Merril Lynch Sees Romanian Economy Contracting 3.4% In ’09, 3.1% In 2010

“After a surprisingly strong growth in 2008, the GDP is likely to contract sharply in 2009 and 2010. This in part will be due to underlying trend ‘normalization’ and in part due to the upcoming fiscal adjustment that is likely to be enforced by the IMF program agreed on 25 March,” a Merrill Lynch report said Tuesday.

Romania and IMF agreed last week on an economic program supported by a EUR12.95 billion loan under a two-year stand-by arrangement. The total value of the financial package that includes a EUR5 billion loan from the European Union, and a EUR1 billion loan from the World Bank is of EUR19.95 billion.

As regards inflation, Merrill Lynch said it would overshoot the central bank’s inflation target of 3.5±1%, due in part to still relatively high underlying inflation pressure and in part to leu weakness.

“Large external and increasing fiscal imbalances remain the major concerns for Romania, but the imminent fiscal tightening and the resultant recession should bring about a swift re-balancing to Romania’s external position in 2009-2010. Indeed, following the agreement of the IMF program we revised down our 2009 fiscal deficit forecast down to 4.4% of the GDP from 7.5% of the GDP, and expect current account deficit to fall to 9% of the GDP in 2009 and 6.5% of the GDP in 2010,” according to the report.