Lately, economic recovery has been an increasingly firm tendency in Romania, both in what Western officials and analysts had to say, and in statistical data published by the National Statistics Commission (CNS) and the National Bank of Romania (NBR). Therefore, recent events, such as the beginning of EU accession talks and, within this context, the imperative need to encourage investment (both foreign and domestic) as a source of recovery, along with scandals surrounding investment funds and the credit cooperatives illegally called “popular banks,” have brought into public attention the issue of the business environment in Romania, the need to bring economic dynamics on a positive track. Under this context, I have pointed to several macroeconomic indicators that improved early this year, such as industrial output and GDP, inflation rate, exports volume and trade deficit, interest rates, currency reserves, foreign public debt and its service, etc. Among the positive signals was the release of the IMF loan instalment and the opening of capital flows from World Bank and EU programmes. In the period to come, entries of productive foreign capital and resumption of domestic savings will be crucial.
Industrial output
In May, industrial output rose by 5.9% month-on-month in absolute terms, after a decline in April (-5.7% compared to March). Hopefully, this will be a definitive distancing (by almost 20%) from the January 2000 all-time minimum in monthly output, in comparable prices, over the whole period after 1989 (the previous all-time low was in January 1999). In the first five months of the year, according to recent CNS data, output grew 3.4% against 1999. For June, we estimate growth should continue (2-3%), but should dwindle somewhat in June. In August, growth could be expected to resume, and further accelerate in September. Over the third quarter, we expect a significant rise, both against the previous quarter (around 4%), and against the 3rd quarter of 1999 (about 13.5%). According to our forecasts, in the first half-year industrial output should top last year’s by about 5%, and for respective nine-month periods the difference should be as high as 7%. Such a development would indicate entry into a stage of longer-term economic recovery (including structural changes such as restrained activity in unmarketable areas and a parallel development of marketable ones).
Inflation
Except for January and April, in the first part of the year monthly inflation has fallen within the government’s sub-30% annual target. In May, inflation was 1.8%, and for June, CNS has reported 2.9%. In the first five months, inflation was 15.7%, which makes for an annualised 42% (therefore, still far above the official target). In the first half-year, inflation was 19% (compared to 30.8% in the first six months of 1999). This equates to a lower annualised rate, below 42%, therefore closer to target. For July and August, our estimates place inflation lower (below 1.5%), but in September it should bounce back to 2%. Over the first three quarters, we expect an inflation rate between 23-25%, which in annualised terms means 32-35%. Under these circumstances, the task of price stability in the second half of the year becomes very important, Next to the NBR policy, whose target parameter is curbing inflation. The association of economic growth to inflation will continue, however, into the following years (beginning with 2004, inflation is expected to drop below 10%).
Unemployment rate
After the significant growth in the first two months, in correlation with renewed economic growth, unemployment dropped significantly to 11.2% at the end of May. As economic restructuring continues, unemployment, however, will not always be in direct relationship with output. According to our estimates, after a relative stabilisation in June and July (around 11.2%), unemployment will grow in the following months (0.1-0.2% a month). Overall, speedier restructuring of the national economy will likely be accompanied by more unemployed due to additional pressure on the budget. Of course, conversion and retraining programmes will be needed for laid-off personnel. A significant drop in unemployment, in a more remote future, will only be possible at the extent to which economic restructuring is finalised and conditions are set into place for durable economic recovery. First of all, this calls for large-scale investment programmes, which, at least in the first stage, will target the public sector and infrastructure development.
Money supply
At the end of 1999, money supply was almost 80% above its level at the end of the previous year, compared to an annual inflation rate of 54.8%. In the first two months of the year, changes in money supply (the daily average) were insignificant (Aâ1% in January and Aâ1.8% in February), but in March and April it picked up the pace (Aâ4.5% and 6.9%, respectively). A stagnation is expected in May, and an average 2% a month afterwards. In the longer term, however, money supply will probably link to the growth rate of the real economy and to inflation. Still, considering the propagation of perturbations caused by the new fiscal rules, at least in the first half-year, we find a distance between money supply (in nominal terms) and consumer prices, which has somewhat affected lei transactions, as well as the leu/dollar exchange rate. However, the situation will be tackled, over the course of the following months, as prices tend to stabilise and we witness a so-called re-monetisation of the economy.
Household savings
In 1999, household savings grew less than inflation (44% compared to 55%), which is a significant decline in real terms. The tendency that began in the last two months of the previous year, with nominal-terms savings overshooting inflation, was reversed in January and February 2000. Only in March, savings outgrew inflation (2.6% compared to 1.8%). But in April through June, people’s savings again depreciated in real terms. For July and August, we expect a period when savings will grow in real terms. In the first quarter, savings depreciated by 0.6 percentage points, and in the second quarter, by more than 7 percentage points. For the third quarter, however, we expect people’s savings to grow in real terms, gaining almost two percent. For the first six months, real-term depreciation of people’s savings exceeded 8.5%, while the level will reach 7.5% for the first nine months of this year. As to the structure by the two components (savings in lei and hard currency, converted at the exchange rate), in late 1999 the hard currency component grew to 34.9% from 26.0% at the end of 1998 (of course, the devaluation of the domestic currency against Western currencies had a major impact). This tendency will only stop when confidence in the domestic currency gains strength. And the end of January, the hard currency component was already above 35%, but it then fell below this level (about 34% in February and 34.8% in April). In May, however, the component apparently exceeded the 35% threshold again. For the following months, we expect a relative stabilisation of the hard currency component.
Exchange rate
In 1999 overall, depreciation in nominal terms of the exchange rate against the US dollar was roughly two-thirds, compared to almost 55% annual inflation. In the first part of the year, the exchange rate has been fluctuating. In January and April, it was below inflation, and in February, March, May and June, above it. In addition, for the third quarter we estimate the exchange rate to grow faster than inflation. In the first quarter, inflation has been superior to the exchange rate growth (the leu/USD ratio) by 1.8 percentage points, but in the second quarter the exchange rate grew roughly as much as domestic consumer prices (9.6% and 9.8%). For the third quarter, we expect the exchange rate will still grow faster (around 10%, compared to 4.3% inflation). In the first five months of the year, nominal depreciation of the domestic currency (13.4%) has been below inflation (15.8%), and as in the first quarter, changes are similar (17% – exchange rate and 19.1% – inflation rate). As to the January-September period, with all the favourable impact of resumed economic growth and ongoing positive tendencies in foreign trade, our estimates show the exchange rate will outpace inflation by about 5 percentage points (29% against 24%). Here, the Central Bank should continue its interventions to maintain the exchange rate within a safety corridor and bolster popular and business interest for savings in the domestic currency.