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Large, fast-growing market on south-eastern flank of EU

Champagne corks popped in Bucharest on January 1, 2007 to celebrate Romania’s entry into the European Union. With dynamic economic growth of 7.7% in 2006 and an average annual rate of 6.0% in the period 2001-2006, its debut was impressive. Nonetheless, the country has a lot of ground to catch up – analysis Deutsche Bank Research.

A wrong development strategy, political turmoil and adverse global influences had thrown the economy off course in the 1980s. In four years GDP shrunk by one-third. Meanwhile, the country is moving rapidly ahead. Despite certain stability risks, the outlook is very promising. The economic upswing witnessed since the beginning of this decade is driven by domestic demand.

The double-digit average annual growth in investment is a reflection of the enormous modernization needed in Romania. However, private consumption has also gathered momentum in recent years. An important driver has been the population’s growing affluence (per capita income in Romania was about one-third the level in Euroland in 2006 based on purchasing power parity, as compared with only one-fourth in 2000). But Romanians have also discovered buying on credit. Ever since the major share of Romania’s commercial banking sector passed into western ownership in the course of privatization, it has sharply increased its lending to households and firms with the support of the foreign parent banks. Despite counter-measures, the rate of growth in lending (approximately 50% in real terms year over year) has not fallen significantly.

The credit boom – especially the disproportionately strong growth in consumer finance, much of which was lent in foreign currency – has markedly increased the risk of widespread defaults. Still, this heightened vulnerability of Romania’s banking system to crisis is cushioned insofar as the foreign-owned financial institutions can probably rely on financial support from their western parents if they get into difficulties. (