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Tuesday, June 10, 2008

Romania Inflation May 2008

Romania's inflation eased slightly in May to 8.5 percent but still exceeded market forecasts.

The Romanian central bank has raised rates by 275 basis points since October to bring the cost of borrowing to 9.75 percent. Bank officials accept inflation may well be running at around 6 percent at the end of this year, well above the 2.8-4.8 percent target.

Romania's economy grew a hefty 8.2 percent in the first quarter, compared with 6.1 percent in the same period in 2007. The growth beat expectations of a 6.4 percent increase during the period.

This has triggered warnings from central bankers about the economy possibly overheating as increased consumption and vast credit growth fuel a large expansion of the country's current account deficit. The current account deficit was at around 14 percent of GDP, last year, raising concerns about possible trouble financing it should foreign cash flows dry up.

The International Monetary Fund will revise upward Romania's economic growth forecast for this year, following strong first quarter GDP data, but said it was still expecting a slowdown in 2009. Romania's economy grew by a higher than expected 8.2 percent in the first quarter, fanning overheating concerns as the new European Union member also struggles with a ballooning current account gap and resurgent inflation. After April's annual consultations with authorities, the Fund came in with a 5.5 percent growth forecast for this year and a 4.7 percent estimate for 2009, compared to 6 percent in 2007.

It has said the potential slowdown could be caused partly by the knock-on effects of the global tensions. "The latest (growth) data were on the strong side, and the IMF team will revise up the projection of GDP growth for 2008, compared with the April visit,"

Central bank Governor Mugur Isarescu said at a seminar in Bucharest today that first-quarter growth is ``risky.''

``An economy growing this fast has vulnerabilities,'' Isarescu said. ``A high speed of growth means high risk. Among the vulnerabilities linked to this high speed of growth is the difficulty in transitioning from growth that generates imports to growth that generates exports.''

The trade deficit widened to 2.02 billion euros ($3.2 billion) in April, compared with 1.61 billion euros in the same month of last year, the Bucharest-based National Statistics Institute said on June 9.

The government predicted on May 14 that farm output will probably double this year from last year, when drought destroyed a third of Romania's crops, further boosting growth in the second half.

``It's very likely that, under conditions of a good farm harvest, growth will be well above the estimates from the beginning of the year,'' central bank Governor Mugur Isarescu said at a seminar in Bucharest today. ``A good harvest will add a billion euros ($1.5 billion) to economic growth.''

The current-account gap widened in the first quarter to 3.52 billion euros from 3.17 billion euros a year earlier. Fitch Ratings and Standard & Poor's have lowered their outlooks on Romania's credit rating, citing the gap.

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