“Early indicators show a slowdown of the Romanian economy in the coming quarters. For instance, production in the automotive sector has decreased since June 2019. Furthermore, we expect the new government to dominate tax expenditures, at least to a certain extent, which will also reduce growth. In general, amid falling global demand, continuous commercial tensions and a much more reduced growth – – the main export destination of Romania – we forecast a GDP growth of 4.2% in 2019 and a slowdown to 2.8% in 2020”, according to Euler Hermes analysts.
Inflation has jumped from an annual average of 1.3% in 2017 to 4.6% in 2018, due to wage raises, a pro-cyclic fiscal stimulus and too loose monetary policies, the survey also shows.
“In fact, the combination of these factors and an intense inflation were the clear signs of an overheating economy which started in 2017. Despite the growth somehow cooling off after 2017, the overheating indicators dd not actually vanish. Meantime, after the inflation rate moderated to 3.3% at the end of 2018, it increased again to an average 3.9% year-on-year in the first three quarters of 2019, and, in seven out of nine months, it was above the central bank’s inflation target of 2.5%. Nevertheless, the central bank has kept its benchmark interest rate stable at 2.5% since May 2018. Consequently, the real interest rates are negative, which, in principle, requires the harshening of the monetary policy. This means the monetary policy still is too loose”, as per Euler Hermes analysts.
Euler Hermes analysts also expect the state budget deficit to keep growing to approximately -4% in 2019, as a result of delayed VAT refunds in 2018 and, mainly due to significant pension increases. They also expect the current account deficit to remain high in upcoming years.
“In combination with the forecasted fiscal deficit growth, this may increase the external financing needs to excessive levels. Also, the decline rate of the external debt-to-GDP ratio may reserve, from 75% of the GDP in 2012 to 49% in 2018 – we expect a ratio of 51% in 2020”.
Euler Hermes, a subsidiary of Allianz SE, is a credit insurance company that offers a wide range of bonding, guarantees and collections services for the management of business-to-business trade receivables.