Barclays: Beware of spiralling deficit and public debt

The budgetary deficit-deepening trend is a reason for concern, and Romania needs tough measures to avert a “debt spiral”, state the analysts of Britain’s Barclays group.

Whereas the deficit may halt at 7.5% in GDP against the 7.3% target this year, analysts consider cutting the deficit at 5.9% in 2010 is unachievable.

“The fiscal problem is difficult as recent deteriorations are structural and cyclical. Trends will not reverse automatically once the country exits recession, they will require unpopular political measures. These should be related to pension reform, addressing losses state-owned companies are coping with and raising the main taxes,” states Daniel Hewitt, senior economist for emerging economies of Europe, the Middle East and Asia with Barclays Capital.

Austria’s Erste Bank also considers the state will not be able to reach the budgetary deficit target for 2010, agreed with the IMF at 5.9%, with the imbalance to hit 6.5%-7% in GDP.

On the other hand, Barclays considers the state will not have any problem in financing its 4bn-euro deficit in November and December domestically, after foreign banks have recommitted to maintain their exposures to Romania and the RON will not come under pressure, either.

The British analysts point out that the foreign deficit, Romania’s main problem in the past years, has adjusted, so that the RON, close to all-time lows, would have room to advance. At the same time, the NBR may resume the monetary policy relaxation cycle once political turmoil subsides, with RON interests likely to go down to 6% next year, from 8% at present.

Barclays Capital analysts consider Romania will see its economy decline by 6.5% this year, a quite upbeat estimate compared with local analysts’ projections. For 2010, they project 2% economic growth mainly due to the basic effect. Less optimistic, Erste Bank analysts believe Romania will register 0.2% GDP growth.