Fitch: reform regress likely to upset balance

Romania is likely to register only 4.3% economic growth this year against the official target of 4.5-5%, analysts of the European financial rating agency Fitch say in the country report concluded this month.

Given that growth may undershoot the official target, it is possible that the final budget outturn will exceed the 3% goal. Nonetheless, the agency’s analysts consider that the result should still account for an improving trend of macroeconomic indicators.

“Fiscal tightening, rising unemployment due to stepped up industrial restructuring, the end of favourable base effects in the agricultural sector and weak global demand suggest that growth may slightly slow down next year,” Fitch reports reads.

Thus, the agency expects GDP growth of 4% next year. In addition, after widening to 6.1% of GDP in 2001, the current account deficit should widen to 6.3% in 2002. On the other hand, Fitch estimates that the investment upward trend will consolidate.

Fitch considers that the banking system remains vulnerable to shocks, in spite of the progress made.

“The long-term macroeconomic outlook remains uncertain and, as many banks have traditionally relied on treasury bills and foreign exchange operations, they remain susceptible to financial shocks,” Fitch’s country report says.

Bank intermediation remains limited, although the National Bank of Romania (NBR) has cut the reserve requirement and the government resorts less to the banking market for financing. At the end of 2000, bank assets accounted for 29% of GDP, compared with 68% for the region as a whole.

The authorities hope to cut the inflation rate to single digits by 2004, but this requires sustained progress with structural reform, agency experts maintain. Otherwise, a further exchange rate adjustment, with knock-on effects on inflation, is likely to be necessary to support the external position over the medium term.

“Due to the slow pace of industrial restructuring and limited financial discipline within the corporate sector, wage growth amongst state owned enterprises has remained above productivity gains and has continued to hamper the National Bank of Romania efforts to cut the inflation rate,” Fitch’s report says.

On the other hand, the National bank of Romania also faces the problem of entrenched inflation expectations within the private sector.

With an eye on the dollar and with the other on the single European currency, the policy of the National Bank of Romania has caused the disinflation process to be fairly gradual and the shift in currency focus has caused some confusion, the agency report concludes.