2007, the year of deeper economic imbalances

The year 2007 has been a turning point for Romania, after EU integration, marked by widening economic imbalances and political environment fragmentation.
One of the risk factors for 2008 is further fiscal policy expansion amid elections, rating agencies believe.
“2007 has been definitely decisive for Romania, after EU integration. This year’s macroeconomic trend has been dominated by rising economic imbalances, namely wider current account and budgetary deficits, along with a higher inflation. At the same time, the fragmentation of the political scene has led to a lack of stability in terms of the economic policies needed to counter risks,” Marko Mrsnik, a S&P analyst, told Mediafax.
The wider current account deficit is reflected in Romania’s rising dependence on foreign capital inflows at a time when global markets are roiled by the US mortgage crisis.
In the first 10 months, the current account deficit reached 13.34bn euros, up 71.7% from the similar period of 2006, accounting for 11.3% of the GDP estimated for 2007, according to NBR data.
The trade balance deficit, which hit 14.03bn euros, up 61.8% from January-October 2006, had a decisive impact over the current account amount.
At the same time, consumer prices rose by 0.93% in November, with annual inflation at 6.67%. Against December 2006, consumer prices posted a 5.89% increase, above the 5.7% forecast the NBR announced for the entire year.
“(…) Monetary policy has been quite lax, despite the 0.5% interest rate hike, as authorities are oscillating between the need for a firmer policy, to limit inflation, and the risks that this policy should strengthen the RON and widen the current account deficit,” said Andrew Colquhoun, a director with Fitch Ratings.
The government’s fiscal policy adds to the economy overheating pressures, with the budgetary deficit scheduled to rise next year from 2007, added Colquhoun.
“I expect Romanian economy imbalances to lessen gradually and in a disciplined way, without crises,” said Colquhoun.
As regards next year, analysts expect fiscal policy to remain expansionary, given that 2008 is an electoral year.
“Moody’s considers that on medium term Romania’s outlooks are positive. EU integration will further boost investments, leading to rising revenues and expenditures. (Economic) growth could be somewhat hindered by the structural reform deficit.
In 2008, there will be two opposite forces acting in the economy. First, elections could lead to rising governmental expenditures. Secondly, the liquidity crunch internationally could translate in shrinking financial flows in Romania, hurting investments and consumption,” stated Kenneth Orchard, an analyst with Moody’s Investors Service.
Agencies’ ratings for Romania are “BBB minus” in the case of S&P, “BBB” – Fitch Ratings and “Baa3” – Moody’s.