Seeking to correct large twin imbalances
Overview:
The government has secured a large IMF-led financial package to support its economic reform program. This is a positive development that should underpin confidence in Romanian assets and help to ensure the start of a significant rebalancing of the economy after years of fast but unbalanced growth. Large fiscal and current account deficits accumulated as growth was too heavily reliant on domestic demand and readily available capital inflows. Reduced access to credit and a large depreciation of the currency have already started to force the current account deficit lower. But the fiscal adjustment that would reinforce this process and add credibility to the Inflation Targeting regime will be extremely difficult to implement at a time of negative growth. Government unity is vital and is likely to be thoroughly tested.