Romania: Fiscal adjustments needed to contain the widening deficit
The second-quarter flash GDP print confirmed that the Romanian economy is slowing rather rapidly. GDP advanced by 1.1% in the second quarter and 1.7% in the first half of the year, visibly below our 2.3% estimate. While the detailed GDP data due on 7 September might shed a different light on the growth dynamic, we have already revised our 2023 GDP growth forecast from 2.5% to 1.5%, while maintaining 2024 at 3.7%.
From a monetary policy perspective, the lower growth is likely to offset the marginal higher inflation forecast of the National Bank of Romania and lead to a stable interest rate environment for the rest of the year. We believe that the central bank is not yet contemplating the timing for a dovish pivot, despite the more frequent dovish statements coming from other central banks in the region. We maintain our view of a first rate cut in the first quarter of 2024 with a key rate of 5.5% by the end of 2024.
Particularly relevant for future growth and the interest rates pattern is the final form of the fiscal package which is under discussion at the moment. We are likely to see a budget deficit target of around 5.0% of GDP (up from 4.4%) but how exactly it will be achieved is important. An emphasis on taxes such as VAT (e.g. a generalised VAT hike) will likely skew the inflation profile higher while it might have a lesser impact on growth, while a more aggressive stance on increasing income taxes (e.g. by eliminating some facilities for employees in IT, constructions, agriculture) could be more growth-detrimental in the short term, but more helpful on the inflation side.
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