„Although there is progress in keeping public spending in check since the inception of the IMF-EU supported economic program, plunging external trade, incomes and spending are hurting revenues which, in our view, undermines the feasibility of the 2010 budget deficit target of 5.9% of GDP,” Citi analysts said.
Romania and the International Monetary Fund last year signed a EUR13 billion loan agreement, part of a EUR20 billion financial package that includes funds from the European Union, the World Bank and other lenders.
While Romania is expected to successfully complete a fourth review under the program slated for April 27 – May 7, the fifth review due September may pose some problems regarding the deficit target, according to Citi analysts.
Citi estimates Romania’s budget gap will reach 6.2% of GDP at year-end, down from 7.2% of GDP in 2009, but above the government’s target.
The analysts said Romania’s „anemic” economic recovery in the first part of 2010 is not surprising given the high degree of overheating prior to the crisis, but added the absence of any meaningful signs of revival is „concerning.”
„Reaching 8.4% in March, the unemployment rate has displayed a steady upward trend since August 2008, as the household deleveraging continues at full steam. Concurrently, sentiment indicators have not offered much hope, raising concerns about the strength of the much-needed economic recovery,” Citi said in its report.
Nonetheless, the economic growth forecast for 2010 remains unchanged at 1.3%, Citi said.
The analysts said Romania’s leu was the worst performing currency in the region in March, despite the absence of capital account-related pressures and the likely completion of the IMF’s fourth review by mid-June.
Citi said the leu’s disappointing performance was likely due to recent statements by senior central bank officials that strengthened the perception the bank is unlikely to allow the currency to firm too much versus the euro, as well as to potential problems regarding the IMF agreement envisaged at the fifth review mission.
According to Citi analysts, the leu’s exchange rate will reach 4.13 per euro in the second half and 4.15 at year-end.
The central bank seems to have further room for more rate cuts in 2010, Citi said.
„We expect the central bank to go for a 25 basis points rate cut at the next Board meeting in May, bringing the policy rate to 6.25%. Depending on the evolution of the leu and price developments, we don’t rule out a more aggressive path of easing,” the report noted.
However, the bank is unlikely to bring the policy rate substantially below 6.0%, given the absence of significant room for lower real rates, Citi said.
The analysts forecast Romania’s inflation will reach 4.5% at year-end, from an annual rate of 4.7% in December 2009.