Romania’s recovery continues, but headwinds from the regional economic downturn and financial turbulence have severely weakened future prospects. Preliminary GDP data for Q3 show a strengthening of the recovery, driven by an exceptional agricultural harvest and continued strong industrial output growth. Domestic demand has begun to recover, with growth turning positive in construction and retail sales bottoming out. The labor market is also beginning to recover, as job growth has turned positive and real wages have started to rise. However, the euro area crisis is likely to sharply slow growth in the coming quarters. The net export contribution to growth has already slipped. International financial market uncertainty has produced a sharp rise in CDS spreads, which will feed through into domestic interest rates, slowing investment and consumption. Inflation has eased considerably, and is now expected to be within the authorities’ end-2011 target range (3 percent ± 1 ppt.). The current account deficit is expec ed to remain below 5 percent of GDP.
Romania has continued its strong performance under the new program. The authorities met all performance criteria and indicative targets for the third review. Performance under the structural benchmarks was more mixed. Benchmarks on bank restructuring legislation and governance legislation for SOEs were met. Those on SOE privatization and a review of the investment portfolio were partially met, but are expected to be completed by the time of the Board meeting.
The authorities are on track to achieve their 2011–12 deficit targets, but steppedup efforts are needed on key structural reforms. The 2011 deficit target of 4.4 percent of GDP (in cash terms) will be met, and underspending should give the authorities resources to help pay down arrears in key sectors (health care and SOEs). The 2012 budget has been prepared with the objective of a cash deficit of 1.9 percent of GDP (2.1 percent of GDP including some off-budget expenditures), lower than strictly necessary to attain their 3 percent of GDP objective in ESA terms with the EU. While the tight expenditure control needed to reach this goal will be challenging, no new major policy changes will be required. A freeze in pensions and wages, together with additional EU support for the investment budget should deliver the needed adjustment. Progress on the ambitious structural reform agenda has been mixed. Governance legislation for SOEs has advanced, but deregulation efforts in the energy sector have lagged. SOE reforms have moved well in some firms, while remaining inadequate in others. The government shows continued commitment to the measures agreed, but political opposition is intensifying as the 2012 elections approach.
Country Report No. 12/11. January 23, 2012
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