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Erste raises Romania 2017, 2018 growth fcast, sees no rate change next year
Romania's economy is expected to grow by a real 5.1% in 2017 driven by private consumption, before economic expansion slows down to 3.9% in 2018, Erste Group analysts said on Monday, increasing its forecasts for both years, seenews.com informs.
In a previous forecast issued in March, Erste said Romania's economy would grow by a real 4.3% in 2017 and 2.8% in 2018.
"Household consumption will remain a key driver of economic growth both in 2017 and 2018, but now we see a broader contribution of different sectors to real GDP, including industrial production," the analysts said in their latest macroeconomic outlook on Romania.
Also, the loose fiscal policy pursued by the government at present along with supportive external demand from the eurozone fuel the cyclical growth of the Romanian economy, the analysts pointed out. Retail sales and services are key growth drivers this year, as the government's fiscal policy is likely to continue to be expansive, they added.
However, risks should not be overlooked as growth will slow down next year due to less traction from the fiscal policy.
Erste also said it expects Romania's budget deficit to reach 3.4% of GDP in 2017, decreasing its previous forecast of 3.5% deficit.
In Romania, Austria's Erste Group owns Banca Comerciala Romana (BCR), which is the country's top bank by assets.
In May, the European Commission (EC) warned Romania that the government may miss its budget deficit target and urged the government to take action to avoid the opening of an excessive deficit procedure. Based on the 2017 spring forecast of the Commission, Romania's headline general government balance is projected to reach a deficit of 3.5% of GDP in 2017 and deteriorate further to 3.7% of GDP in 2018, thereby breaching the Maastricht Treaty reference value of 3% of GDP.
"The local environment has been calm so far and investors seemed to pay little attention to the pro-cyclical fiscal policy followed by the government and the warnings of the EC about the departure of the structural budget deficit from the targets," Erste analysts said.
Romania's annual economic growth accelerated to 5.7% in the first quarter from 4.8% the quarter before on the back of strong consumption, according to the latest preliminary data available from the country's statistical board, INS. In 2016, Romania's economy expanded by 4.8% year-on-year compared to a revised growth rate of 3.9% in 2015.
On the monetary policy front, Erste expects the Romanian central bank, BNR, to hold its key rate at 1.75% in 2017 and 2018.
"Going forward, we expect a flat key rate at 1.75% in 2017-18, as inflation will enter the BNR's target in the coming months and remain comfortably inside the interval," the analysts said.
BNR's monetary policy rate has stayed at 1.75% since May 2015, following a cut from 2.0%.
Romania's annual consumer price inflation remained at 0.6% in May, a 24-month high and the same rate as in April, INS data showed on Monday. This is the highest inflation rate since May 2015, when consumer prices climbed 1.16% year-on-year.
Erste forecasts end-2017 inflation of 1.4% in Romania, while for end-2018 it expects a 2.7% rise in consumer prices.
The bank sees a minor depreciation outlook for the leu in the coming quarters due to domestic risks to the fiscal deficit and current account gap widening, but expects that the external risk backdrop will be the trigger to any significant directional move in the exchange rate.
The analysts forecast the leu/euro pair at 4.62 at the end of 2017.
"Our forecast assumes that the BNR will be somewhat less keen on fighting 2-3% depreciation, which runs counter to the current mantra of a stable RON, which is why we see risks to our forecast as tilted to the downside," the Erste analysts said.
The analysts also noted that ten-year bond yields had fallen gradually in May and reached 3.65% at the beginning of June, their lowest since November last year, in line with a similar move by their regional counterparts.
Record economic growth in the first quarter and a budget surplus after the first four months have reinforced investor confidence in the capacity of the government to repay future debt, while external factors like doubts over Trump's policies boosted demand for government bonds in major markets, Erste said.
The bank has revised its end-year average 10-year yield forecast to 4.10% in 2017 from a previous 4.30%.
"We foresee a minor increase in bond yields towards the end of this year, followed by a more substantial one in 2018, as market rates could converge towards the key rate after a potential hike of the deposit rate by the BNR. Major market bond yields could also follow an upward trajectory, feeding into local yields," the analysts said.