Capital Economics: Romania Economy To Decline By 2.5% In 2010

Romania’s tough austerity measures designed to reduce the budget gap and keep a multilateral aid agreement on track will not come cheap and the country’s economy is expected to shrink by 2.5% in 2010, London-based Capital Economic said in a survey.

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"In stark contrast to recent developments in Hungary, the fiscal cutbacks announced by the Romanian government have so far helped to keep its IMF-led loan deal alive. But these will come at a cost," the survey noted.

"We now expect the economy to contract by 2.5% this year, and think that it will do well to stagnate in 2011."

The analysts at Capital Economics estimate Romanian economic growth is unlikely to recover to its potential rate of around 4% until 2013 at the earliest.

The government's unpopular measures, including pay cuts and a five percentage points slash in the sales tax, are likely to put further downsize pressure on financial markets and add to inflation.

Analysts expect the national currency leu to drop to 4.4 per euro by year-end from 4.27 per euro currently.

"Admittedly, Romanian exporters will receive a competitive boost from a weaker leu. But (…), the bigger picture is that external demand is unlikely to offer much support to growth for a number of years either," the report noted.

Domestic revival is expected to stall further because of the government's austerity pack, while lending is seen tight for the period to come.

"The looming 25% cut in public sector wages and the 60,000 public sector job cuts planned for 2010 alone will exacerbate the pain," the analysts said.

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