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EBRD downgrades Romania's economic growth forecast in 2020
The European Bank for Reconstruction and Development (EBRD) has downgraded its estimates of Romania's economic developments in 2020 as a result of the crisis caused by the coronavirus pandemic, according to the bank's latest Regional Economic Prospects published on Wednesday.
According to the latest EBRD forecasts, the Romanian economy would decline 4% this year instead of advancing 3.2%, as forecasted by the bank in November 2019. In 2021, the EBRD expects a 4% expansion of Romania's GDP.
According to EBRD, the Romanian economy continued growing at a robust rate in 2019, at 4.1%, driven by a strong expansion of private consumption on the back of pro-cyclical fiscal policy, including public salary and pension hikes. As a result, the fiscal deficit increased, reaching 4.6 per cent of GDP in 2019, but general government debt remained moderate, at 35% of GDP as of end-2019.
In 2020, EBRD forecasts a contraction of 4.0%, assuming the epidemic significantly slowing down from the second quarter, with all containment measures removed. The domestic lockdown (a state of emergency was introduced in mid-March) is reducing private consumption of services involving face-to-face contact and durable goods, which together account for around 30 per cent of total spending (for instance, new passenger car registrations fell by 32% year-on-year in March). This impact may be somewhat compensated by an increase in food spending, which accounts for 25% of total spending, the largest share in the EU.
Investment has been falling amid uncertainty and bearish market sentiment, while liquidity pressure and disruption of supply chains may interrupt ongoing investment projects.
Although Romania is less dependent on international trade compared with its regional EU peers, goods exports (which account for about 33% of GDP) have been hit, not least because of the significant exposure to the strongly affected Italian economy (goods exports to Italy account for about 10 per cent of total goods exports). Moreover, Italy is also an important source of remittances for Romania, accounting for about one third of the country's remittance inflows.
The fiscal stimulus package deployed, of about 3% of GDP aims to inject additional liquidity and preserve jobs. Further support may, however, be limited in the context of the fiscal position, with a target deficit of 6.7% of GDP in 2020 in the revised budget.
Romania's sovereign rating outlook has been downgraded to negative by the main rating agencies. As part of crisis response, the National Bank of Romania (NBR) eased monetary policy and started buying public debt. In 2021, the private sector is expected to bounce back and drive the recovery, with a growth rate of 4.0%."
The European Bank for Reconstruction and Development (EBRD) is a bank that was established in 1991 to aid ex-Soviet and Eastern European countries transitioning into democracies by developing free-market economies.
The EBRD is the main institutional investor in Romania, with investments of over 8.6 billion euros. In 2019, the bank invested and financed 22 projects in different sectors of the Romanian economy of a total value in excess of 372 million euros.
The European Commission has also lowered its estimates of the Romanian economy this year and predicted that Romania will record a significant decrease of 6%, after several years of robust growth, while the government deficit is expected to reach 9.2% of GDP this year. According to the spring economic forecasts published on May 6 by the European Commission for 2021, Romania's economy will recover, even if not at the pre-crisis level, thanks to an expected advance of 4.2%.
In its turn, the International Monetary Fund (IMF) has revised down significantly its estimates of the Romanian economy this year amidst the ongoing coronavirus pandemic, shows IMF's latest report "World Economic Outlook" published in mid-April.
In October 2019, the IMF estimated that Romania will record an economic advance of 3.5% in 2020, but according to the new forecasts the Romanian economy should contract by 5% in 2020 and recover in 2021, when it should advance 3.9%.
The IMF's new estimates are much more pessimistic than those of the World Bank, which, a week earlier, forecast that Romania will grow by 0.3% in 2020, down from a 3.8%-raise forecast three months previously. The World Bank is also betting on a recovery of up to 4.4% in 2021.