VOLKSBANK ROMANIA SA

 | 

MELANIA HANCILA

 | 

STOICA TIBERIU

  |  2013-03-25

Future challenges for the Romanian economy

The European Union economy faces significant challenges as the export-oriented Northern countries which posted robust growths in the previous period, recorded a significant slowdown of their activity recently, while the fiscal consolidation measures adopted by the countries affected by the public debt crisis generated output losses and the hike of the unemployment rates.

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VOLKSBANK ROMANIA SA


MELANIA HANCILA

MELANIA HANCILA

CHIEF ECONOMIST at VOLKSBANK ROMANIA SA


STOICA TIBERIU

STOICA TIBERIU

PH.D, FINANCIAL ANALYST at VOLKSBANK ROMANIA SA

Documents

 

Difficult external conditions 
 
 
ECB’s commitment to adopt all the necessary measures in order to prevent the escalation of the public debt crisis reduced the systemic risk and restored investors’ confidence. Despite the recent monetary policy measures adopted by ECB, the European leaders agreed that the future creation of a banking union as well as the adoption of an adequate framework regarding the financial regulation and supervision (Basel III) represent an efficient safety belt for the financial markets and for preventing the escalation of crisis and further output losses. The structural changes that affected the developed economies of the EU had a significant impact on the Central and Eastern European (CEE) countries, including Romania, due to the financial and trade connections between the regions. The public debt crisis generated a reduction of banks’ exposure on CEE countries which could diminish the financial resources in foreign currency.
 
 
EU non-refundable funds absorption: The main catalysts for economic growth
 
 
A higher absorption of EU funds could represent the main growth engine of the Romanian economy in the short and medium-term and could offset the negative impact determined by the reduction of the foreign banks’ exposure in the context of the public debt crisis. Boosting EU funds absorption also affects the long-term GDP trend (potential output). Considering the production function approach, EU funds affect directly all the three components of output. The human resources programmes influence the total factor productivity and the human capital as they allow the increase of the labor productivity and a better integration of individuals in the labor market. The structural, cohesion and agricultural programmes increase the capital formation and the employment rate. The high absorption of EU funds also ease the business cycles, as it alleviates the impact of boom and bust periods and allows a better allocation of labor and human capital. 
 
 
The rate of absorption of EU funds is very low currently, amounting to only 12.2 % in February 2013. During 2007-2012 our country drained only EUR 2.2 bn from the total allocated amount of EUR 19.8 bn. The highest absorption rates were registered in the two pillars of the Common Agricultural Policy (CAP). The direct payments to farmers accounted for 69 % of the total amount allocated to Romania, standing at EUR 3.9 bn, while the absorption rate for Rural Development represented 45 %, the amount drained standing at EUR 3.7 bn. As regarding the Structural and Cohesion Programmes, the highest absorption rates were registered at the Regional Operational Programme (24.7 %) and the Operational Programme for Administrative Capacity Development (24.6 %). At end-February 2013, the lowest absorption rate was recorded at the Sectorial Operational Programme in Transport (6.5 %), proving the inefficiencies in the Romanian public administration.
 
 
Despite the fact that in the latest fiscal-budgetary strategy, the government announced that it intends to absorb EU funds totaling EUR 2.5 bn in the current year, the new Minister for European Funds set even a more ambitious target, planning to bring the absorption rate at 50 % by end-2013 which represents more than EUR 7 bn. The new target is a tremendous challenge for the Ministry of European Funds, the main risks to this scenario representing the technical difficulties, the tendering procedures and the poor capacities of the beneficiary. 
 
 
The European leaders reached an agreement regarding the EU financial plan for 2014-2020 at the European Summit in Brussels in February 2013. EU long-term budget will represent around 1 % of the EU Gross National Income (GNI), the budget being lower as compared to the initial version proposed by the European Commission (EC). According to the agreement, the total structural, cohesion and agricultural EU funds allocated to Romania for 2014-2020 will increase by 18 % as compared to 2007-2013 period, amounting to EUR 39.9 bn. After the Summit, the Romanian President stated that the Cohesion Funds allocated to Romania will increase by 10 %, while the funds for the Common Agricultural Policy (CAP) will grow by 27 %. 
The main priority of authorities should be robust economic growth.
 
 
In 2012, the deterioration of the macroeconomic conditions determined a slowdown of the economic activity, as the real GDP advanced only by 0.3 % as compared to an increase of 2.2 % in 2011. The reduction in the GDP growth rate was mainly attributed to the negative evolution of the export-oriented industry, as well as the slump of the agricultural production due to the severe drought. According to our baseline scenario, the Romanian economy is expected to grow by around 1.2 % y/y in 2013, +/- 0.5 % pps depending on the performance of agriculture and EU funds absorption. The downside risks to this scenario are given by possible difficulties in implementing the announced reforms, as well as a further deterioration of the macroeconomic and debt crisis in EU.  
 
 
The global crisis generated significant changes regarding the structure of investments as companies tend to focus more on the tradable sectors. The export-oriented and competitive economies registered better evolution during the crisis as compared to other economies. 
 

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