The Middle East crisis will most likely impact the Romanian economy, as well as the other economies in the region, through two main channels: higher oil and gas prices maintaining inflation at elevated levels, hence deferring expected rate cuts with an impact on growth (also impacted directly from the higher energy prices), and investors’ higher risk-aversion typical in such circumstances adding to the country’s borrowing cost that was en route to declining.
Romania’s long-term (10-year) local currency bond yields rose to 6.4% on March 2 from under 6.3% at the end of last week (February 27) – which was the lowest level in several years.
With the duration of the conflict and still uncertain timeline of the normalisation, the magnitude of the impact can also only be estimated on a provisional basis.
As for Romania, the impact of the conflict will be felt mainly through the inflation channel, Adrian Codirlaşu, president of CFA Romania, told Agerpres, as reported by Economedia.ro.
“If the current developments continue [to escalate],” the oil price will rise by 15-20%, including the increase before the conflict, anticipated by markets, and the fuel price will rise by 10%-15% according to Codirlasu.
However, the CFA president said his association is maintaining the forecast for 6%-7% inflation in Romania at the end of the year. He implied this was the CFA association’s forecast before the conflict, even if the projections from leading banks for year-end inflation were much lower.
The National Bank of Romania (BNR) revised its year-end inflation forecast slightly upwards to 3.9%. Analysts expected BNR to cut the policy rate from 6.5% currently, either in May (local analysts) or later in the year, after the inflation drops significantly in July-August (Capital Economics).
“The disinflation process will be slower, and inflation will remain around 10% for a longer time. However, we maintain our projection that we had at CFA Romania, namely an inflation rate between 6% and 7% at the end of the year,” said the president of CFA Romania.
Codirlasu also mentioned risk-aversion as a relevant factor for Romania.
ING Bank, in an analysis of the regional impacts from the Middle East crisis, mentioned Romania’s vulnerability in terms of inflation and estimated a 0.5 percentage point rise in inflation for 10% rise in the price of oil, Cursdeguvernare.ro reported.
Turkey is considered the most vulnerable economy, where “a 10% increase in oil prices translates into an additional 1.10 percentage points in inflation.” Romania is the second most sensitive country in the region, with an estimated impact of 0.50 percentage points, followed by Hungary, with 0.45 percentage points.
In contrast, Poland and the Czech Republic are seen as relatively less exposed, due to lower exchange rate volatility and a more diversified energy mix.
From a monetary policy perspective, ING estimated that most central banks in the region will adopt a wait-and-see attitude.
“It is expected that central banks will prefer to wait for more clarity, and any immediate decision on interest rate cuts will be postponed,” ING analysts noted.
iulian@romania-insider.com
(Photo source: Ruletkka/Dreamstime.com)
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