Romanian Economy Overheating ?

04:37 - 23 Nov 2007

FT warns about Romanian economy overheating

The Romanian economy has been ringing alarm bells lately - commented British 'Financial Times' daily yesterday. The British analysts start from the concrete example of a successful business in Romania, Raiffeisen Bank, to show that not all news is good news about the Romanian economy. While many investors feel there are profits to be made from banking, real estate and other sectors, the International Monetary Fund sees things differently, and warn about the dangers of economic overheating in Romania.

Juan Fernandez-Ansola, the IMF representative in Bucharest, says: "In this over-optimistic environment we are trying to keep people alert to risks - not an easy task." On the other hand, Stephen van Groningen, Raiffeisen Romania's Dutch chief executive, treads carefully between enthusiasm and caution: "The long-term prospects are good. But in the short term, something has to give in the next year or two to get the economy to a better balance."
But now, according to the IMF, inflation jumped to 6 per cent last month from a low of 4 per cent in July. Rising energy and food prices, compounded by drought, are playing their part. But so is local pay, which is set to rise by about 20 per cent in real terms, with productivity rising at less than 10 per cent annually.

Moreover, whereas in other ex-communist states pay increases are generally driven by private companies, in Romania the public sector is in the lead, thanks to strong trade unions, which have just forced a 28 per cent rise in the minimum wage, FT further notes. Rising pay is helping to fuel a credit boom, particularly in home loans, but creditors might be assuming too much risk.