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BUCHAREST (Romania), December 15 (SeeNews) - Romania's real economic growth is expected to quicken to 4.5% in 2016 driven by private consumption, before slowing down to 3.2% in 2017, Erste Group analysts said on Thursday, confirming their previous forecast made in October.
"Private consumption is expected to remain the key driver of 2017 growth, supported by the solid increases in net wages and improving labor market conditions," Erste Bank analysts said in their latest macroeconomic outlook report on Romania.
However, they added, fiscal policy might be less supportive for growth next year, while external risks emanating from a number of uncertainties such as the UK leaving te EU and political developments in Turkey, which could also weigh on economic growth.
Budget deficit is expected to reach almost 3% of GDP in 2017, the analysts said, confirming their previous projection made in October.
"Household consumption will probably remain a key driver behind the growth, while investments may provide less support for economic growth.
We believe that the new government, which will take office after the December elections, will become more restrictive in 2017 in order to keep the budget deficit in line with the Maastricht criteria," the analysts commented.
On Sunday, Romania held regular parliamentary elections which were won by the Social Democratic Party (PSD) with historical scores of 45.5% for the Chamber of Deputies and 45.71% for the Senate, almost final data from the country's electoral commission show.
"With Romania one of the poorest tax collectors in the European Union, the balance of risks is mostly tilted to the upside in the absence of proper remedies," Erste analysts warned.
Romania's GDP grew 3.8% in 2015, fuelled by domestic demand and higher investments and private consumption, which were backed by growing wages, low interest rates and falling prices.
On the monetary policy front, Erste expects the Romanian central bank to hold its key rate at 1.75% in 2017.
"We maintain our view of no key rate changes throughout 2017, since inflation is likely to hover just above the lower end of the target band of 1.5-3.5%. The central bank may decide to narrow the symmetrical corridor of interest rates for the deposit facility and lending facility to 100 basis points from the current 125bp, while keeping minimum reserve requirements for both RON and FX liabilities flat at 8% and 10%," Erste analysts said.
BNR's monetary policy rate has stayed at 1.75% since May 2015 following a cut from 2.0%.
Romania's annual consumer price deflation deepened to 0.7% in November from 0.4% in October influenced by the VAT cut to 20% from 24%, in force from the beginning of 2016.
Annual deflation is likely to persist until end-2016 before a turnaround towards the BNR inflation target of 2.5% in 2017, the analysts said.
For end-2016, Erste forecasts negative inflation of 0.6%, while for end-2017 it expects a 1.7% rise in consumer prices.
Erste sees the Romanian leu mostly trading in a range of 4.4-4.6 per euro next year, but it does not rule out volatility, especially once the UK triggers Article 50 to start the formal process of leaving the EU and due to political developments in France and Germany. Uncertainty linked to geopolitical tensions remains another key source of risk to the outlook, the analysts said.
Analysts also noted that government bond yields are likely to be driven by a combination of internal and external factors. A much higher budget deficit and an external backdrop riven with uncertainties, such as the upcoming Fed rate hikes, possible early elections in Italy, France and German elections next year, could dent investors confidence often throughout 2017, analysts said.
In light of these latest external developments, Erste said it has revised upwards its end-year 10-year yield forecast to 3.50% in 2016 from 3.35% and to 3.75% in 2017 from 3.40%.