Romania could experience the strongest economic growth among CEE countries, standing at 4.1 percent in 2016, according to an Erste report on the region. However, the Austrian lender says this comes “at the expense of fiscal loosening and prospects of monetary tightening.”
Looking at the situation in Romania, the institution expects monetary tightening towards the year-end, due to excessive fiscal risks and skyrocketing domestic demand. The recent fiscal measures come into force from the beginning of the year have pushed consumption up by 20 percent, though BNR stated that this increase was mainly driven by the “poor segment of the population,” and that it was mainly for import products.
The Erste report confirms BNR’s forecast concerning the budget deficit, expecting it to go to 3 percent of GDP, even in their “more forgiving forecast”.
“The aggressive cut in VAT, increase of public wages and rise of policy uncertainty (mainly the latest proposal to allow non-payment of mortgages) put serious question marks on fiscal sustainability in Romania,” Erste says. The institution reminds that the EU commission has also sent warning signs on the potential for instability.
According to the report, this will also be felt on the bond market, where yield increases are expected, as “erratic policymaking and fiscal loosening are expected to have a negative effect on risk assessment”.