Romania: Country Economic Forecast 2012

This report contains detailed economic forecasts and analysis for Romania. Romanian GDP grew by 1.8% quarter-on-quarter in 2011Q3, with a healthy increase in all components.

Abstract

While the outlook for exports is at risk due to the Eurozone debt crisis, the government's efforts towards greater absorption of EU funds imply that domestic demand should support growth. GDP is expected to rise by 2% in 2012 and 3.2% in 2013. But the outlook is dominated by downside risks. About 20% of Romania's banking sector is owned by Greek institutions while much of the rest is held by Austrian banks, which have been advised by the Austrian government to limit their lending to Eastern European subsidiaries. This poses a major risk to Romania's banks and hence the economy. The annual inflation rate eased further to 3.1% in December, well within the central bank's target rate of 3% +/-1%. The improving trend in inflation and the downside risks to growth prompted the central bank to ease monetary policy in January. The key interest rate was lowered for the second time since November, from 6% to 5.75%. Parliament recently approved a very tough budget for 2012 that aims to reduce the deficit to 1.9% of GDP this year (from a target of 4.4% in 2011). The authors of the report believe that this is too ambitious and expect the deficit to be about 2.4% of GDP. In its latest review, the IMF praised Romania's progress on the fiscal front and made a further US$660m available under the precautionary US$4.1bn standby facility agreed in March 2011.