Item: IMF deal struck

The Romanian delegation of the IMF that spent two weeks in the country came to an agreement with the government over the revised fiscal targets. The original deal in March contained an expectation of a 4.1% GPD drop in 2009, but in light of the performance of the Romanian economy in past months this expectation has been altered to 8-8.5%. The original budget deficit goal of 4.6% has been revised, and the new agreement contains a goal of 7.3%.  The IMF forecasts a slight growth in 2010, namely 0.5-1%.  The agreement means that Romania will get the second trench of the loan agreement amounting to 1.9 billion euros. The IMF has agreed that part of the installment will be used to lower the budget deficit. There were also strict conditions that the government has to meet: it has to cut spending by 0.8% of the GDP, pass a law unifying wage schemes in the public sector and propose a fiscal responsibility law to parliament by the end of November to enforce long-term planning and better controls of spending by state entities. Also, Romania’s wage expenses have to drop 0.5% annually, below 6% of GDP by 2015.



Analysis and forecast: decreasing risk

The fact that an agreement was reached and it contained an easing of the terms was no surprise. Nevertheless, Romanian authorities did not leave this to chance. During the two-week IMF mission there were numerous statements serving two goals: putting pressure on the delegation and at the same time convince them that Romania is aware of the economic reality and is determined to enact the necessary steps. Mihai Tanasescu, representative of Romania to the IMF told that the country met all targets for the first 6 months, but there will be discussions over amendments of goals for the next two quarters. President Băsescu also asserted in an interview that Romania will not be able to meet the parameters established for the second half of this year due to the stronger recession and he hopes that the IMF will understand Romania’s situation. Presidential hopeful, leader of the Social Democratic Party (PSD) Mircea Geoană went on to say that it is compulsory for the IMF to release the second instalment. PM Emil Boc started the line of reassuring statements saying that the unitary wage law must be completed by 14 August. Not much later finance minister Gheorghe Pogea said that the economy is likely to contract 8% in 2009 which was lowered to 8.4%-8.5% in later interviews, and another official at the ministry told Reuters that 2010 could see a drop of 2%. It seems that the officials competed for the “Who can be more pessimistic” prize, a stark contrast to statements earlier in the year. Later the minister held meetings with other ministers to discuss cutting the number of state agencies. He also went on record by saying that in the 2nd quarter the economy shrank by more than 8%. President Băsescu also weighed in with stating that an urgent reduction of public servants by 20% is needed.





Item: no relief for the Romanian economy

The number of Romanians with retail loans overdue by more than 30 days rose by 47.7% on the year in May, while overdue loans exceeding 90 days represent 82.4% of the total late payments. The total number of overdue loans also rose from 806 086 in April to 858 539 in May. The Romanian auto market declined about 58% in the first half of the year, stronger than the decline indicated by the statistics, as those counted sales outside the country as sales on the local market, according to the head of the Romania’s Association of Carmakers and Importers (APIA). Foreign direct investments also went down by 43%, but they fully financed the current account deficit as that dropped by more than 73%. Not much after the IMF mission had left, the National Statistics Institute revealed that Romania's GDP for the second quarter of 2009 dropped by 8.8% y-o-y, and in the first half it dropped by 7.6% y-o-y. A more positive development was the reduction of the interest rate to 8.5%, which is the lowest since March 2008.



Source: IMF and interviews



Analysis and forecast: increasing risk

The budget deficit in the first half amounted to 2.7% of GDP, and it rose to 3% in July. Against the trend in the EU, investor confidence in the Romanian economy dropped for the fourth consecutive month, signalling a continuing distrust. Morgan Stanley put the prospective date of Romania adopting the euro between 2015 and 2020, as the 3% budget deficit "looks like a distant prospect". Although this conclusion is too “safe”, it does have merit. Merrill Lynch is a bit more optimistic than the government and the IMF when it comes to this year’s GDP contraction, putting the drop to 7.5%, but its prediction for next year is in line with the official statements. The financial institute’s previous forecast was of a 6.4% contraction. The outlook for the second half of the year does not look good. Analysts’ consensus puts the lowest point to sometime in the third quarter, with some expecting a 10% drop. Everyone expects the contraction to stop in the last three months, but growth may be farther away. Economists interviewed by Ziarul Financiar stated that it can only be expected in the second half of 2010 the soonest, and even if the economies of Romania’s most important trade partners – such as Germany or the USA – start to pick up steam, their positive effect on Romania can be delayed by as much as 9 to 12 months. It was a positive development that the parties of the big coalition announced recently that they agreed on 32 anti-crisis measures, but their vague formulation was criticised by economic actors.