Macro: COVID-19 Update Romania: Fiscal outlook clouded, but good funding progress recently

Although COVID-19 infections have increased recently, the healthcare system appears not to be overburdened for the time being. In Q1 2020, real GDP advanced by 0.3% qoq and by 2.4% yoy, better than expected. Economic activity re-entered on an upward trend in mid-May, but real GDP contraction in Q2 vs Q1 is estimated around 15%. Net-net, following a GDP plunge by 7% in 2020, we see real GDP increasing only by 4.5% in 2021. While there was limited fiscal space, monetary policy was a bit more powerful. Regarding fiscal policy, the PM clearly stated that the planned 40% pension increase will be reconsidered. However, we continue to expect that the full-year public budget deficit will end 2020 at around 8.5%. Nevertheless, given recent successes, funding this years very large public budget deficit seems increasingly feasible. Still, risks for a sovereign rating downgrade to non-investment grade remain inflated by fragmented political landscape and looming elections.

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.