RAIFFEISEN: Government"s Projections Are Unrealistic

The annual rate of inflation accelerated to 4% in July, from June"s 3.8%, due to a prolonged drought that boosted food prices. Raiffeisen analysts expect the annual rate of inflation to climb above 4.5% yoy in the next months.

The NBR raised its forecast for December yoy inflation by 0.2 percentage points to 3.9% from 3.7%. But it cut the 2008 projection by 0.5 percentage points to 3.7 percent.Central Bank said also that its inflation target for 2009 is 3.5% with a band of +/-1%, down from its target in 2008 of 3.8% with a band of +/-1%.

NBR kept its key interest rate unchanged at 7% on 31 July, after four consecutive cuts. Raiffeisen analysts believe that NBR will keep the key interest rate at 7% by the end of the year. It raised the interest rate on the deposit facility to 2% from 1% and it lowered the interest rate on lending facility to 12% from 14%.

Romania"s current account deficit more than doubled to 7.81 billion EUR in the first half of 2007 over the same period of 2006 as strong imports continued to widen the trade gap. Raiffeisen expects the current account deficit to increase to around 14% of GDP by the end of the year.

Government decided recently to increase the public pensions by 43% in 2008. Raiffeisen analysts think that there are some concerns regarding the sustainability of this measure without an increase in taxation.

Romania"s government envisages a budget deficit of 2.7% of GDP in 2008. Public spending will be at 41.7% of GDP and revenues at 39% of GDP. According Raiffeisen Research, the government"s projections for 2008 but also for this year are not realistic.