In our view, contraction was mainly the result of a plunge in agricultural output. We expect detailed GDP data to be published on 6 December to show that real GDP excluding agriculture – a better proxy (less volatile) for underlying activity in case of Romania – to have advanced only marginally in Q3. Economic recovery seems to have run out of steam. Fragile external demand weighs on exports, while recovery in domestic demand remains modest. Our GDP growth expectations for 2013 (+2%) are likely to be a bit optimistic.
After a rapid increase in the previous months, volatile food prices (fruits, vegetables, eggs) unexpectedly fell in October. As a result, monthly inflation rate (0.3% mom) and annual inflation rate (5% yoy) were below our expectations and market consensus (5.3% yoy). Prices for processed foods have increased further in October and we expect them to remain on an upward trend in the coming months. Inflation rate would probably end the year at 5.1% yoy and would fluctuate between 5.2-5.6% yoy in H1 2013.
Central bank remained on hold at its most recent monetary policy meeting on 2 November, keeping the monetary policy rate unchanged at 5.25%. Central bank seems to be more concerned about volatility of capital flows (with impact on exchange rate) than inflation dynamics (inflation is driven mainly by transitory shocks). In our baseline scenario, we do not foresee a hike in the key interest rate in the following quarters.
Romania tapped one more time external markets in October and borrowed EUR 1.5bn in a 7-year Eurobond. Also, the Finance Ministry succeeded to almost completely roll-over a EUR 800mn local T-bond maturing on 10 November in two steps (EUR 422mn in October and EUR 342mn in November). FCY issuance is an important funding source for the budget deficit and for the country’s external funding needs.
Public budget deficit amounted to only 1.2% of GDP at the end of September, which was better than we had expected.
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