Macro: COVID-19 Update Romania: A sharp deterioration of fiscal situation is a major concern

As Romania apparently has passed pandemic peak, with a number of new COVID-19 cases stabilizing, the government plans a gradual abolishment of the lockdown measures. The economic fallout has been relatively mild so far, with Q1 data revealing relatively moderate output loss for manufacturing, while the export and the services sectors sustained much larger loss. With the pandemic crisis impact on economy still unfolding the picture is likely to worsen considerably in April for which the numbers are likely to paint very grim outlook for Q2. With the shutdown of a larger part of the economy since mid-March till mid-May the output loss is likely to be severe. We project a 10-15% GDP decline for Q2 while the economic recovery is likely to gain ground only in 2021. A shallower outlook for 2020 is also taking into account weak fiscal position of the Romanian government due to the accumulated deficits limiting fiscal space within which the government can respond to the pandemic. In this context the government will be unable to extend a larger stimulus package to the economy, while relatively rosy economic assumptions of the revised budget signals stark underestimation of the deficit target, which, in our view, can reach 8.5% of GDP in 2020 due to more pronounced slump in the economy and lower inflation reducing the budget revenue in nominal terms. In this situation the government lacks clear policy of exiting fiscal loosening next year, while the pension increases planned for this and next years can only add problems for the budget. Therefore, fiscal policy remains the main source of troubles including the risk of losing investment grade rating already this year. With S&P review of Romanias rating scheduled on 5 June the odds of one notch downgrade from BBB- to BB+ remain high, not least due to Romanias fiscal policy blues. All three major rating agencies - S&P, Fitch and Moodys - maintain negative outlook on Romania. Meanwhile the National Bank remains committed to providing liquidity to financial sector while a possibility of another 50bp rate cut remains on the table too.
This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.