EU: Romania 2011 Current Account Gap Seen Stable At 4.5% Of GDP

05.13.2011 By Florentina Dragu

Romania’s current account deficit is expected to remain stable at around 4.5% of the gross domestic product in 2011, due to insufficient structural reforms, according to estimates of the European Commission.

"The external balance is not expected to improve in 2011 and 2012 as structural reforms necessary to enhance export capacities and competitiveness have been insufficient so far," the Commission said in its spring economic report.

It said Romanian current account gap will widen to 4.8% of GDP in 2012, due to a stronger pick-up in private consumption.

The current account balance has adjusted significantly to minus 4.2% of GDP in 2010 from a deficit of 13.6% of GDP in 2007, following a sharp decrease in consumption, a weaker exchange rate of the leu and rising exports.

"Household consumption is expected to strengthen this year, albeit to a lesser extent than investment because of still weak household balance sheets. Many households are still adjusting to the higher debt-service-to-income ratios that have resulted from high interest rates and lower incomes, leaving little margin for more consumption (…) Nevertheless, the improvement in consumer confidence and a slight recovery in employment are expected to push up consumption in 2011," the report noted.

The Commission forecasts a 0.6% growth in private consumption this year, followed by a more accelerated increase of 3.1% in 2012.

Trade deficit is seen at 4.9% of GDP in 2011, from 4.8% of GDP last year. In 2012, the gap is expected to widen to 5.1% of GDP, as export growth is estimated to decline.

Unemployment is projected to decrease to 7.2% in 2011 and to 6.8% in the following year, from 7.3% in 2010.

The Romanian central bank will probably miss its year-end target of 3% for 2011 by "a significant margin", as inflation is expected to top 5% in December, due to substantial food and commodity price increases and the impact of a value added tax rate increase in July 2010, the Commission said.

"With a projected annual average inflation rate of 6.7% in 2011, there is little scope for lowering the policy rate," the report noted.

GDP growth is forecast at 1.5% in 2011 and at 3.7% in 2012, on the back of stronger domestic demand.

The projection is above the estimated growth rate potential of 2.5%-3% for 2012.