September 14 (SeeNews) - Romania's economy is expected to grow by a real 5.5% in 2017 driven by retail sales and services, before economic expansion slows down to 4.1% in 2018, Erste Group analysts said on Thursday, increasing their forecasts for both years.
In its previous forecast issued in June, Erste said Romania's economy would grow by a real 5.1% in 2017 and 3.9% in 2018.
"A positive surprise in the form of stronger real GDP growth is not ruled out in 2017 if agricultural production is plentiful," the analysts said in their latest macroeconomic outlook on Romania.
Looking at 2018, the orientation of the government's fiscal policy is a key element for next year's growth because there is a significant amount of uncertainty as to whether the government would be able to implement a new round of fiscal easing measures, the analysts pointed out. Household consumption seems to be cooling off and consumer confidence fell slowly after hitting an all-time high in the spring, they added.
The government seems to have changed its fiscal strategy and started to look for different methods to reduce the fiscal gap, Erste said. An additional excise tax on motor fuels will be introduced in September and October, along with other measures limiting public expenditures.
"Keeping the budget deficit at 3% of GDP in 2018 in the context of fresh pay hikes in the public sector would automatically bring an additional fiscal burden for private companies, hampering growth," analysts said.
Erste said it expects Romania's budget deficit to reach 3.0% of GDP in 2017, lowering its previous forecast of 3.4% deficit.
Romania's annual economic growth accelerated to 5.9% in the second quarter of 2017 from 5.7% in the prior quarter on the back of strong performance of the industrial sector and rising consumption, according to the latest preliminary data available from the country's statistical board, INS. In 2016, Romania's economy expanded by 4.8% year-on-year compared to a revised growth rate of 3.9% in 2015.
On the monetary policy front, Erste expects the Romanian central bank, BNR, to hold its key rate at 1.75% in 2017 and 2018, but to hike the deposit rate in the coming quarters.
"We think that the depo rate could be hiked as soon as the fourth quarter of 2017 if the European Central Bank announces in the next months a reduction of its quantitative easing program," the 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 inflation slowed down to 1.2% in August, from 1.4% in July, surprising analysts.
Erste forecasts end-2017 inflation of 1.9% in Romania, while for end-2018 it expects a 3.3% rise in consumer prices.
The bank continues to favor the scenario of a slight depreciation of the leu in the coming quarters, due to risks already seen throughout 2017. The analysts forecast the leu/euro pair at 4.62 at the end of 2017.
"We think that local developments would not significantly increase leu volatility and see the external environment as the potential trigger for any significant directional move in the FX rate," the Erste analysts said.
The analysts also foresee a minor increase in bond yields towards the end of this year, followed by a more substantial rise in 2018.
The bank has revised its end-year average 10-year yield forecast to 3.90% in 2017 from a previous 4.10%.
"Medium- and long-term yields could follow an upward trajectory, similar to that of the yields in major markets, once large central banks begin or continue the normalization process of their monetary policies," the analysts said.
In Romania, Austria's Erste Group owns Banca Comerciala Romana (BCR), which is the country's top bank by assets.
(1 euro = 4.5984 lei)