Financiarul

Romania experienced an economic boom from 2003-08 that led to overheating and unsustainable imbalances, the letter of Intent by Romanian Government to the International Monetary Fund reads.

GDP growth averaged over 6.5 percent per year, as foreign direct investment and capital inflows helped finance high consumption and investment growth.

Robust export growth to EU countries reflected a process of increasing economic integration with western European economies. However, import growth was even faster, generating increasing current account deficits that peaked at 13.5percent of GDP in 2007.

The overheating economy and rapid capital inflows complicated monetary policy, resulting in credit growth averaging 50 percent per year in 2006-7, and impairing BNR’s ability to achieve its inflation target notwithstanding increases in interest rates and reserve requirements together with other measures to slow credit growth.

Fiscal policy was strongly procyclical, with the government deficit rising from under 1 percent of GDP in 2005 to near 5 percent of GDP by 2008.

In recent months financial stress has increased, reflecting external factors and the downturn in the economy.

The extreme shift in investors’ risk preferences, which spilled over from difficulties in global financial markets, has negatively affected the exchange rate, equity prices, and the government securities market.

Capital inflows have slowed sharply, and BNR reserves have begun to decline. The effects in Romania have not been especially pronounced compared with elsewhere in the region, but due to the weak fiscal position and high current account deficit, the vulnerability to a sudden drop in capital flows is higher.

The economy turned sharply down in the fourth quarter of 2008, and prospects for 2009 are negative.

GDP fell by 3.9 percent (q-on-q seasonally adjusted) in the last quarter, and indicators suggest the decline is continuing in early 2009.

At this time, the outlook is particularly uncertain, as it depends on global events and on restoring consumer and investor confidence. We anticipate a sharp drop in GDP this year, but are hopeful that the measures proposed in this program will limit the fall.

A recovery is expected to begin in 2010, but growth is likely to remain near zero due to the lingering effects of the global downturn on Romania.

The risks to the baseline scenario are mostly on the downside, reflecting uncertainty about the speed with which financial markets will stabilize and the depth of the global economic slowdown.

Inflationary pressures are expected to abate as the economy turns downward, and we anticipate that CPI inflation will move to within the BNR target band by late 2009 and remain there throughout 2010.