BMI's Executive Summary

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From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Romania's overall CBBER is 58.2. The equivalent figures for the USA and the eurozone are 84.8 and 81.4 respectively. Romania's CBBER is fifth of the countries we monitor in Central and Eastern Europe. Within the CBBER, the most important aspect is the (banking) market structure element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Romania's rating for this element, 58.8, is about the same as the overall CBBER but higher than the country structure element of the limits of potential returns, 50.0. BMI expects relatively strong growth in total assets and client loans during the 2007-2012 forecast period. Nevertheless, the CBBER shows that Romania's banking sector is being held back by country factors, including the low level of per-capita GDP, GDP volatility and the overall financial infrastructure.

Q207 real GDP growth in Romania fell behind expectations, and our full-year 2007 growth forecast has now been downwardly revised. Our new 5.8% forecast is predicated on a slight tempering in consumer spending and a disappointing performance of exports, yet is still slightly above market consensus. This is supported by our view that government spending looks set to accelerate, and that growth will also be supported by investment, particularly in construction, as massive infrastructure projects and economic development continue.

Real GDP growth of 5.6% in Q207 was largely the result of slow export growth and a poor performance in the agricultural sector. There were also some signs that the cumulative 125bps of monetary tightening effected over the course of 2006 have started to curb consumer credit growth and spending. Although it continued to outpace the headline rate by some way, private consumption expanded by 10.7% year-onyear (y-o-y), down from 11.3% in Q107. However, the starkest fall was seen in exports, which grew just 2.4% y-o-y in Q207, down from 12.9% y-o-y over Q107, and likely reflecting an as-yet poor ability of Romanian goods to compete in the wider market of the EU.

There is little doubt that, looking at the wider picture, the business cycle in Romania has peaked, and that growth will slow in 2008. Our current forecast is for 6.2% real GDP growth, in line with our view of slowing global growth, from 4.9% in 2007 to 4.7% in 2008. Not only do we expect a cyclical slowdown, we also foresee foreign investment slowing, as the bulk of large privatisations are over, and with high wage growth and strong nominal leu appreciation, investors start to look even further east. A global‘credit crunch' also signals a turning tide for easy access to credit, which has fuelled Romanian consumption over the last few years. However, the country's economy is still developing fast, and we expect growth of between 4% and 5% to continue for the remainder of the forecast period.