ING Bank Romania Expects Stronger Leu, Lower Inflation This Year

Near-term prospects for economic growth in Romania have abated but are likely to surprise on the upside for the next two years, according to an ING Bank report published yesterday. This is due in part to strong domestic demand from both the private and public sectors. Thus, ING analysts maintain their GDP growth forecast at 6.5% for 2007 and raise their 2008 forecast from 5.7% to 6.3%.

Inflation is expected to overshoot the NBR target of 4% in 2007 but to remain within the 1% comfort band. Nevertheless, inflationary pressures should remain strong for the entire policy horizon. ING specialists expect end-2008 inflation on the upper boundary of the 1% range associated with the 3.8 inflation target.

Political uncertainties are amplified due to the heavy election calendar over the next two years, increasing pressure on domestic and external imbalances and maintaining a high risk profile for economic growth in the medium term. However, ING analysts believe the risk to be minimal, as they expect global growth to remain robust and EU accession to provide enough of a strong anchor in the case of any global slowdown.

The NBR is expected to take a break in 2007, leaving the monetary policy rate unchanged, but the risks to the interest rate profile are on the upside for 2008. ING specialists estimate the RON will consolidate its recent gains with further appreciation potential limited by the central bank. Analysts expect more volatility and a rapid and probably sharp reversal in 2008 on the back of twin deficits. They are also concerned that the reform fatigue will put a stop to the current impressive growth and that what we are experiencing now is "as good as it gets" for the Romanian economy for some time.

Romania has the opportunity to adopt the Euro in 2014, and consistently catch up with central Europe reducing to minimum the populist reforms. Euro adoption in eight years would support a fairly bullish view on the RON, stability in nominal terms and appreciation in real terms.