Citi Bank: Romania’s economy to shrink 6pc in 2009

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Romania’s economy will shrink six percent this year, said Citi Bank Romania economists in their most recent analysis, with the figure adjusted downwards from the previous estimate of four percent; the revisal is the result of the worse than expected setback of the Gross Domestic Product in Q1 2009 (a 6.4pc fall, compared to a previous estimate of 2.5 percent).

At the same time, the current account deficit of around 0.7 billion euros in the first three months of 2009 was considerably lower than the about four billion euros in deficit registered over the similar period of 2008, which highlights the magnitude of Romania’s current foreign deficit.

Citi Bank Romania experts now estimate Romania’s current account deficit will this year be about 6.5pc of GDP, as to 12.3pc in 2008.

According to the cited experts, the effects of the worse than anticipated contraction of Romanian economy in the first quarter of the year are as follows: a probably lower current account deficit, a high likelihood that the fiscal performance is affected by lower collections, whereas the National Bank of Romania might have stronger reasons to reduce the benchmark interest rate.

At the first look, the first implication appears to have positive effects on the exchange rate, whereas the other two seem to exert an adverse effect.

In the eventuality of a sharp fall of the global risk appetite and of a severe reduction, by BNR, of the benchmark interest rate, the aforementioned effects – in the context of the EUR 20 bln IMF and EC loan secured by Romania – will probably not influence the exchange rate evolution.

BNR is also expected not to take the interest rate too low, should it become evident that such a move affects the local leu. In addition, the IMF might be more lenient if the reason for missing the fiscal targets is mainly represented by lower revenues associated with an economic contraction past expectations.

A strong rise in delinquent loans, which could affect the financial stability and investor confidence, poses a major risk and therefore this factor requires careful monitoring, given its negative effects on the exchange rate.

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