Romania’s Yawning Curr Acc Gap Raises Growth Sustainability Concerns – World Bank

World Bank analysts see Romania’s gross domestic product growing 6% this year, slowing further to 5% in 2009, and reaching 4.3% in 2010, according to the World Banks’ report "Global Development Finance. The Role of International Banking”.

Romania’s economic growth has been robust in recent years, increasing an average 6.5% each year between 2003 and 2006. The country’s forecasting commission expects economic growth of 6.5% in 2008.

Romania’s central bank governor Mugur Isarescu last week said economic growth may exceed the government’s estimate for this year, but warned the country should improve its productivity and keep an eye on its yawning current account deficit. Isarescu said economic growth shows no sign of slowing down, but warned it is 60% driven by consumption.

"The region (Europe and Central Asia – e.n.) showed little improvement over the past years in its traditional exposures and vulnerabilities. Save for oil exporters, almost all economies witnessed a deterioration in current account position during 2007. This was most pronounced in the Baltic states, Bulgaria and Romania, raising concerns about the sustainability of growth in these countries," the World Bank said in its report.

Inflows of foreign direct investment to the region achieved record highs in 2007, of $162 billion, but in the light of the global credit crunch, flows are expected to fall off in 2008, covering a diminishing portion of current account deficits.

An increasing reliance on foreign bank borrowing suggests that economic activity could suffer if the external financial environment deteriorates suddenly, World Bank analysts noted.

"Most developing countries are well placed to withstand a sharp downturn in the credit cycle, but some may be vulnerable, particularly those with large external imbalances and heavy financing needs. In 2007, current account deficits exceeded 15% of gross domestic product in Bulgaria, Latvia and Lebanon, and are projected to improve only marginally in 2008. Moreover, current account deficits in Lebanon, Pakistan, Romania, South Africa, and Ukraine are expected to widen in 2008," the report noted.

World Bank analysts see Romania’s current account deficit widening to 15.7% of GDP in 2008, to slow down to 14.5% of GDP in 2009 and 13.3% of GDP in 2010.

In 2007, Romania’s current account deficit stood at 13.9% of GDP.