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Political jitters cloud Romania's fiscal outlook, reform path - Erste

Political jitters cloud Romania's fiscal outlook, reform path - Erste Romania GDP, budget

BUCHAREST (Romania), September 10 (SeeNews) -

Political turmoil in Romania is clouding the country's fiscal outlook and reform path, Erste Group analysts said on Friday.

"Political tensions boiled over after ministers from junior government coalition party USR resigned and the party subsequently filed a motion of no confidence. The main government party, PNL, has its congress on September 25, which should clear the political outlook to some extent," Erste said in an analysis.

The government is committed to the EC for an ambitious reform programme as part of the EU Recovery and Resilience Plan, but both political determination and parliamentary support are needed to swiftly pass the needed reforms, Erste analysts noted.

Political noise is also adding fundamental pressures on the Romanian leu currency, Erste said, adding that it is expecting a gradual weakening trend, as long as the twin deficits remain relatively wide, by around 2-3pp vs. the euro in nominal terms per year over the next 3-4 years.

The leu weakened to an all-time record level against the euro on Tuesday, central bank data showed. The central bank, BNR, set its reference exchange rate at 4.9488 lei per euro on Tuesday, a drop of 0.03% compared to Monday's value.

Erste said it is keeping its previous forecast for a 7.4% growth of Romanian economy in 2021, and 4.5% in 2022. "We expect gross fixed capital formation to become an important driver for economic growth over the 2022-27 period, boosted by combined inflows of EU funds of almost 80 billion euro ($94.7 billion) from the regular Multiannual Financial Framework and the Next Generation EU Program," Erste said.

The country's economic output will increase by an estimated 7% in 2021, finance ministry analysts said in August, revising their previous forecast for a 5% growth. Romania's economy contracted by 3.9% in 2020, compared to a 4.1% expansion in the previous year.

Erste analysts also predicted that the central bank will deliver its first rate hike on November 9 in response to rising inflation, fiscal adjustment below expectations, currency weakness and a narrowing real interest rate differential versus peers against the backdrop of a divergent external position. At its last monetary policy meeting on August 6, the central bank BNR decided to keep its monetary policy rate unchanged at 1.25% per year.

Erste also said that it doesn't expect any changes from rating reviews in mid-October.

On Tuesday, Fitch Ratings said that the collapse of Romania’s coalition government could disrupt fiscal consolidation efforts, which are key to resolving the negative outlook on Romania’s ‘BBB-’ rating. Buoyant economic growth and Next Generation EU funding still provide a potential path to deficit reduction, but prospects for tackling long-standing fiscal rigidities could deteriorate, Fitch said.

(1 euro=4.9432 lei)

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