This is an innovative instrument to monitor the region from an economic perspective offering business climate analyses, dossiers, logistics reports and business news
by Unicredit Research
Romania’s Constitutional Court ruled on 25 June that some of the austerity measures to be implemented by the government are unconstitutional. To offset the ruling that pensions cannot be cut, the government decided to increase VAT. These events have prompted the possible delay in a rebound of local demand. This year will also see a one-off jump in inflation as an immediate consequence of the VAT increase.
Romania’s Constitutional Court ruled on 25 June that some of the austerity measures to be implemented by the government are unconstitutional. To offset the ruling that pensions cannot be cut, the
government decided to increase VAT from 19% to 24%. These events have prompted us to re-think some of the trends envisaged for Romania. The possible delay in a rebound of local demand – the VAT increase will directly impact on household consumption - will be reflected in a further drop in real GDP, by 2.5% yoy in 2010, a significant downward revision from our previous forecast of -0.9% year on year.
This year will also see a one-off jump in inflation as an immediate consequence of the VAT increase: CPI will peak in August above 8% year on year (7.7% yoy eop). We believe the inflation rate will not be able to enter the target band in 2010 and the Central Bank will have to leave rates on hold during the coming months. The Romanian government’s fiscal austerity measures amount to around 2% of GDP. The VAT increase should be able to fully offset the effect of the Court decision. Our modified scenario assumes that the implemented measures would be enough to bring the
budget deficit close to the targeted level for this year, with further rebalancing in the coming years (deficit around 5% in 2011). However, we still see some risk of the budget deficit overshooting and weak management of additional structural changes.
The IMF approved the disbursement of approximately EUR 900 million on Friday, following a new review of the country’s performance under the Stand-By Arrangement, after the board was “very impressed” by the fiscal austerity program.
So far, Romania has received around EUR 9.2 bn in IMF money and another EUR 2.5 billion from the Commission. The Commission is expected to disburse a third tranche worth EUR 1.15 billion to Romania in September. Joint teams from the IMF and EU are scheduled to visit the country for a new review mission in the period July 26- August 4.
Original title: Romania macroeconomic update: slower growth & higher inflation