Political Headwinds Could Threaten Economic Recovery S upporting our view that Romania’s economic downturn has likely found a bottom, a flash estimate released by the National Institute of Statistics shows the economy contracting at a rate of 7.1% year-on-year (y-o-y) during Q309, following the 8.7% plunge of the previous quarter. Although the estimate for the third quarter is in line with our view that the pace of economic decline would begin to ease during H209 as the business cycle passes its nadir, we concede that the latest data is still more severe than we originally anticipated. We have revised our end-year forecast to -7.0% accordingly. In addition, we highlight the ongoing political crisis, which despite the recent re-election of President Traian Basescu, is likely to persist in the short term, which risks continued delays to the disbursement of IMF funds. This in turn poses a risk to financial market stability in 2010, as well as the broader economic recovery.
Following two months of political upheaval which has seen the collapse of Romania’s coalition government, continued failure in electing a new prime minister, and an inconclusive presidential election (on November 22), a new president has now been announced. Official results of the December 6 run-off show that incumbent President Traian Basescu (Democratic Liberal Party, PD-L) won 50.3% of the vote, with opposition candidate Mircea Geoana (Social Democratic Party, PSD ) taking home 49.7% of cast ballots. Basescu will now go on to nominate a prime minister who will subsequently propose a new government. However, we caution that the political crisis is unlikely to end here, with further delays in forming a new government likely, especially should the president continue to nominate candidates from the PD-L.
The National Bank of Romania (NBR) held its main policy rate at 8.00% at the latest monetary policy committee meeting on November 3, reflecting uncertainty over the domestic political situation. While the central bank will remain cautious of further monetary easing for the time being, we believe that there remains significant scope to cut rates in 2010, particularly given the weak economic recovery and ongoing disinflation. As a result, we expect the NBR to keep its policy rate at 8.00% in December, before returning to monetary easing at some point in H110. We have pencilled in 100bps in policy rate cuts in 2010 to 7.00%, with the NBR likely to opt for measured adjustments of 25-50bps in order to prevent upsetting financial stability.
Romania’s banking sector continues to muddle through the global downturn, with immediate systemic risks largely diffused as a result of improving global liquidity and risk appetite, coupled with unprecedented stimulus programs across the world. Indeed, falling external borrowing costs have bolstered the banking sector’s debt repayment capacity, while improving risk sentiment has prevented massive decapitalisation of the industry. In addition, the implicit and explicit support of Western parent banks to their subsidiaries in CEE has further shored up the outlook for Romania’s own banking sector. That said, we still expect to see some asset quality deterioration as weak corporate profitability and high unemployment drive non-performing loans higher.
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Romania Business Forecast Report Q1 2010 (Business Monitor International)
Political Headwinds Could Threaten Economic Recovery S upporting our view that Romania’s economic downturn has likely found a bottom, a flash estimate released by the National Institute of Statistics shows the economy contracting at a rate of 7.1% year-on-year (y-o-y) during Q309, following the 8.7% plunge of the previous quarter. Although the estimate for the third quarter is in line with our view that the pace of economic decline would begin to ease during H209 as the business cycle passes its nadir, we concede that the latest data is still more severe than we originally anticipated. We have revised our end-year forecast to -7.0% accordingly. In addition, we highlight the ongoing political crisis, which despite the recent re-election of President Traian Basescu, is likely to persist in the short term, which risks continued delays to the disbursement of IMF funds. This in turn poses a risk to financial market stability in 2010, as well as the broader economic recovery.
Following two months of political upheaval which has seen the collapse of Romania’s coalition government, continued failure in electing a new prime minister, and an inconclusive presidential election (on November 22), a new president has now been announced. Official results of the December 6 run-off show that incumbent President Traian Basescu (Democratic Liberal Party, PD-L) won 50.3% of the vote, with opposition candidate Mircea Geoana (Social Democratic Party, PSD ) taking home 49.7% of cast ballots. Basescu will now go on to nominate a prime minister who will subsequently propose a new government. However, we caution that the political crisis is unlikely to end here, with further delays in forming a new government likely, especially should the president continue to nominate candidates from the PD-L.
The National Bank of Romania (NBR) held its main policy rate at 8.00% at the latest monetary policy committee meeting on November 3, reflecting uncertainty over the domestic political situation. While the central bank will remain cautious of further monetary easing for the time being, we believe that there remains significant scope to cut rates in 2010, particularly given the weak economic recovery and ongoing disinflation. As a result, we expect the NBR to keep its policy rate at 8.00% in December, before returning to monetary easing at some point in H110. We have pencilled in 100bps in policy rate cuts in 2010 to 7.00%, with the NBR likely to opt for measured adjustments of 25-50bps in order to prevent upsetting financial stability.
Romania’s banking sector continues to muddle through the global downturn, with immediate systemic risks largely diffused as a result of improving global liquidity and risk appetite, coupled with unprecedented stimulus programs across the world. Indeed, falling external borrowing costs have bolstered the banking sector’s debt repayment capacity, while improving risk sentiment has prevented massive decapitalisation of the industry. In addition, the implicit and explicit support of Western parent banks to their subsidiaries in CEE has further shored up the outlook for Romania’s own banking sector. That said, we still expect to see some asset quality deterioration as weak corporate profitability and high unemployment drive non-performing loans higher.
Read the article on CompaniesAndMarkets.com
