Unicredit: Romania’s economy growth rate drops to 3.9 pct this year, political risks remain high

Sorin Melenciuc 10/07/2018 | 14:25

The growth rate of Romania’s gross domestic product (GDP) will slow down to 3.9 percent this year, from unsustainable growth rates in the past couple of years, while political risks remain significant, UniCredit economists estimate in the last quarterly report.

In their prior report, released three months ago, the economists have estimated a GDP growth rate of 4.4 percent in 2018.

„The Romanian economy is finally slowing from unsustainable growth rates in 2016-17. The slowdown is not surprising. A significant part of last year’s growth relied on supplyside shocks (a bumper harvest) and large fiscal and credit impulses that are already weakening,” the latest report said.

The economists forecast potential clashes with European institutions, on judicial and on fiscal issues.

“The parliamentary majority’s attempt to change the Penal Code triggered warnings from the European institutions. In July, the Venice Commission will issue a preliminary report on the weakening checks and balances, followed by an opinion regarding the changes to the Penal Code on 19 October. The European Commission asked Romanian authorities to wait for the Venice Commission’s opinions before adopting legislative changes,” Unicredit indicates.

The bank’s economists see rising risks of populist measures in Romania with impact on the economy.

“Due to the busy election schedule, the mix of macroeconomic policies may worsen further, with wages and pension hikes crowding out other types of fiscal expenditure,” Unicredit economists said.

According to the economists, Romania’s goverment will maintain the budget deficit below 3% of GDP in 2018.

“We expect the budget deficit to remain marginally below 3 percent of GDP this year if budget execution excluding wages will be similar to the ones from the previous mandate of the current Finance Minister, Eugen Teodorovici. However, this may be achieved mostly by cutting non-wage expenditure towards the end of the year,” the report said.

Last year, the budget deficit was close to 3 percent of GDP (2.83 percent on cash), after 3 percent of GDP in 2016, but the economists see major risks in 2019.

“The MinFin is focusing on collecting overdue taxes (RON 14-15bn or less than 1.5% of GDP) by offering tax amnesty to households, a one-off fix. More worrying, there is no firm commitment to keep the budget deficit below 3% of GDP in 2019,” Unicredit estimates.

Unicredit’s economists forecast that Romania’s GDP will grow to EUR 200.3 billion (EUR 10,229 per capita) in 2018 and to EUR 213.6 billion (EUR 10,938 per capita) in 2019, from EUR 187.9 billion (around EUR 9,600 per capita) last year.

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