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IMF:Romania's economic recovery to continue in 2014, real GDP seen advancing 2.2 pct
Romania's economic recovery is expected to continue in 2014, with the real GDP seen advancing 2.2 percent next year, as domestic demand growth is supported by a greater absorption of EU funds and there is also positive nominal private sector credit growth, shows the latest International Monetary Fund country report on Romania.
The real GDP growth for 2015 is estimated at 2.5 percent.
The report notes that the economic growth this year is expected to stand at 2 percent, driven by a return to a more normal agriculture harvest following last year's drought and increased exports, particularly to non-EU countries. The flash estimate of 0.3 percent for real GDP growth in Q2 2013 (1.3 percent
yoy) is in line with this projection.
Inflation is expected to decline further during the second half of 2013 to 3.3 percent by year-end, within the BNR's target band of 2.5+/- 1 percent. This is mainly on account of the reversal of base effects as well as expectations that a more normal harvest than last year will hold down food prices. Headline inflation is projected to continue easing to 3 percent at the end of 2014 and to 2.9 percent in 2015, as lower inflation expectations become more entrenched.
The current account deficit is projected to narrow to 2 percent of GDP in 2013 as domestic demand remains weak and imports grow more slowly than exports. In 2014-15 the current account deficit is expected to widen slightly to 2.5 -2.7 percent of GDP as domestic demand starts to recover.
With sizable repayments to the IMF, the country's gross international reserves are projected to decline from EUR 34.1 bln in 2013 to EUR 30.5 billion (five months of imports) by end-2015. Under the baseline scenario, no financing gaps are envisaged.
The report highlights, however, certain risks. A more protracted recession or renewed financial tensions in the euro area could hamper exports, spark a further retrenchment of foreign investment and accelerate bank deleveraging. A deeper than expected slowdown in emerging markets would also negatively impact exports and growth. Moreover, monetary policy tightening in advanced economies could trigger capital account outflows as investors further reassess portfolio risks and returns. Any of these developments would put pressure on the exchange rate, which would feed back to bank and private sector balance sheets, given the large volume of foreign-currency lending.
In addition, renewed political uncertainty in the run-up to elections in 2014, in particular the presidential elections, could weigh on investor and consumer sentiment.
Under an adverse scenario, the euro zone slips back into deeper recession, undermining investor confidence in the region. Over the period 2013-2015 Romania's exports to the euro zone, its main trading partner, foreign direct investment and rollover rates on external liabilities of Romania's banks and private sector would be lower than in the baseline scenario. This would also weaken domestic demand and widen the current account deficit in 2013-2015, reducing economic growth by a cumulative 2.5 percentage points, to 1.5 percent in 2013, 0.3 percent in 2014 and 2.3 percent in 2015. Lower net inflows would require additional external financing of EUR billion, which would be covered by disbursements from the IMF, the EU and the World Bank, and a limited drawdown of international reserves. Under this scenario, additional fiscal measures for 2013 will likely be needed to meet program targets.