Garanti Bank expects Romania's GDP growth rate to slow down next year to 3.7 pct

Garanti Bank estimates that Romania’s GDP growth rate could slow down to 3.7 percent next year, as consumption dynamic is expected to decrease due to pre-stimulus (food VAT cut in June 2015, general VAT cut in January 2016 and public salary hike) levels. In the first nine months of the year, the economy rose by 4.9 percent, strongly driven by consumption.

In terms of production, services, especially the IT and business support activities, are expected to remain the engine of economic growth since they kept the good dynamic of previous quarters.

Headline annual inflation is expected to increase from current -0.4 percent ( October) towards 2 percent until the end of next year, while the core inflation is expected to remain at around 1.2 percent in 2017, according to the report.

Based on it, Garanti Bank estimates that the National Bank of Romania will implement a first rate hike in 2018, when inflation is expected to move above target. In the meantime, Garanti Bank expects NBR to maintain its key interest rate at 1.75 percent by the end of 2017.

According to Garanti Bank’s specialists, Romania’s macro-economic fundamentals remain strong. However, there are two short term domestic risks ahead: the risk of a higher budget deficit for next year driven by factors such as the increase in public wages, but also other measures planned for 2017 and the domestic uncertainties regarding legislative changes that might impact the financial system.

For the banking system, the risk is due to debt discharge law and the Swiss Franc loans conversion law, which are currently subject to revision. The overall impact of these laws, however, would be lower than similar actions in other countries, according to Garanti Bank’s macroeconomic report.

Nevertheless, Romania is viewed as being stable by rating agencies, according to the bank.

“Each year comes with new challenges for both the global and the local economies. 2016 is no exception. The most important fact, however, is that Romania keeps its balance, continues its development and to attract investments. We foresee and optimistic outcome in the upcoming future,” said Ufuk Tandogan, CEO Garanti Bank Romania.

Georgiana Bendre