ANNUAL REPORT JUNE 2010
FEDERATION OF EURO-ASIAN STOCK EXCHANGES
BUCHAREST STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
Romania was plunged into a political crisis in
October after the Social Democratic Party (SDP)
withdrew from the government, leaving a minority
Democratic Liberal Party (DLP) administration led
by the prime minister, Emil Boc, to face a
parliamentary censure motion on October 13th.
Mr Boc's government became the first post-
communist government in Romania to fall as a
result of a successful no-confidence vote in
parliament. A new government is unlikely to be
formed until after the presidential election in early
December.
Romania was a net recipient of EU funding of
EUR1.4bn (US$2.1bn) in 2008, and EU
assistance to Romania will play a central role in
preventing a sharper economic collapse and
stimulating economic recovery. The European
Commission's full report on Romania's progress
in implementing judicial reform and combating
corruption, released on July 22nd, recommended
that safeguard clauses, which could have
included financial sanctions, should not be
implemented, in view of the progress made since
the publication of the previous full report in July
2008. The EU is also likely to have been alarmed
by the speed with which the current political crisis
developed, and by the apparent inability of
leading political figures to compromise in order to
find a solution.
Economic Performance
In 2007-08 the minority NLP government
implemented loose fiscal and wage policies at a
time of excess aggregate demand, contributing to
burgeoning current-account deficits, which were
largely financed by inflows of private capital.
Consequently, Romania faced structural
macroeconomic deficits that were aggravated
by the international financial crisis of September
2008. The crisis choked off external finance
and hit investor confidence, resulting in an
accelerated depreciation of the leu and significant
falls on the Bucharest Stock Exchange (BSE).
In March 2009 the new government secured a
programme of financial support worth EUR19.5bn
from the IMF, the EU, the European Investment
Bank (EIB), and the European Bank for
Reconstruction and Development (EBRD), to be
disbursed over two or three years. It is intended
that these credits will be repaid from 2011, largely
through improved absorption of EU grant finance.
Only a modest recovery is expected in 2010, with
growth forecast at 1%, following an estimated
contraction of 7.6% in 2009. Real GDP fell by
7.6% year on year in the first half of 2009. In the
second quarter it fell by 8.7% year on year and by
1.1% quarter on quarter–the fourth consecutive
quarterly decline. We expect further quarter-on-
quarter falls in the third and fourth quarters, as
domestic consumption remains depressed. After
a slow recovery in 2010, growth is forecast to
rebound in 2011, to 4%. There is still a downside
risk that the recession will be deeper and more
protracted than in our baseline forecast,
especially if additional austerity measures are
required in 2010-11 to bring budget deficits into
line with EU targets.
After slowing to an estimated average of 5.4% in
2009, average consumer price inflation is forecast
to decelerate further, to 3.5% in 2010 and to 3.4%
in 2011. The depreciation of the leu provided an
impetus to inflation in early 2009, but low world oil
prices (relative to 2007-08), as well as falling
international and domestic demand, exerted
downward pressure on prices as the year
progressed. Consumer prices rose by 3.2% in
January-September 2009, taking the year-on-year
rate to 4.9% in September. We estimate that the
contraction in domestic demand, and the fall in
cost-push inflation from energy and food prices,
will bring inflation below the top end of the NBR's
target range by the end of 2009. Provided that
fiscal and incomes policies are tightened, and
that wage growth is curtailed, inflation should fall
to 3.8% by the end of 2010, and to around 3.3%
by the end of 2011. The main risks to the inflation
forecast are tied to the exchange rate, which may
come under further downward pressure, and to
the possibility that the rate of value-added tax
(VAT) may be raised in 2010.
The leu fell to a historic low of Lei3.4:US$1 and of
Lei4.3:EUR1 in February 2009, despite
interventions by the NBR, but rallied after the
announcement of multilateral assistance in
March. The leu appreciated against both the US
dollar and the euro before the political crisis in
late 2009, but fell back towards Lei4.3:EUR1
thereafter. The NBR has announced that its
interventions in the foreign-exchange market will
be "cautious", which could result in increased
volatility. Its attempts to mitigate this will be
helped by its strengthened foreign-exchange
reserves, which reached EUR28.3bn at the end of
September. A correction to the exchange rate of
the long-overvalued leu was desirable, given
worries about declining competitiveness.
However, based on estimates of equilibrium
exchange rates, it is possible that the leu is still
significantly overvalued. The potential problems
for Romania's competitiveness are compounded
by the fact that other currencies in the region
depreciated substantially in 2009.
The current-account deficit shrank by 79% year
on year in January-August 2009, to EUR2.4bn,
mainly because of a 69% contraction of the trade
deficit, to EUR3.9bn, and a 61% reduction in the
income deficit, as repatriated profits from direct
investment declined. However, the current
transfers surplus declined by 31% and services
recorded a small deficit, compared with a
EUR448m (US$630m) surplus in the year-earlier
period. A sharp downward adjustment of the
current-account deficit, from 12.4% of GDP in
2008 to around 5% of GDP, is estimated in 2009.
Slower lending and wage growth will keep a
check on both imports and the trade deficit in
2010-11.*
* The Economist Intelligence Unit Limited, November 2009
Key Information Contacts
National Securities Commission www.cnvmr.ro
Ministry of Public Finance www.mfinante.ro
National Bank of Romania www.bnro.ro
UNOPC www.unopc.ro
National Institute of Statistics www.insse.ro
Romanian capital market www.kmarket.ro
REAL GDP
(ROL millions)
CONSUMER PRICES (% CHANGE PA; AV)
(%)
250
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
200
150
100
50
0
2005
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