Macro: COVID-19 Update Romania: Fiscal outlook clouded by busy elections calendar

COVID-19 development: The easing of lockdown restrictions led to a renewed increase in new COVID-19 cases with a new record peak in mid-August. However, in the last weeks a tendency of the new COVID-19 infections to stabilize has been visible. Targeted restrictions and lockdowns remain the most likely scenario in case of an increase in infections in the following period.
Economic development: The plunge of real GDP in Q2 (-10.5% yoy and -12.3% qoq respectively) was slightly better than our expectations. Real GDP should increase rapidly in Q3 from Q2. However, the economic advance should slow down in Q4. We expect a decline in real GDP by 5% this year, followed by an increase of only 4.2% in 2021. Romanias access to the funds allocated within the Next Generation EU (NGEU) instrument will play an important role for the economic recovery in the coming years, also being an essential factor for enhancing the economic growth potential.
Monetary policy implications: The Central Bank has reduced the monetary policy rate by 100 bp since March, to a level of 1.50% at the present. We consider that the key rate cutting cycle has ended given the high uncertainty and the large macroeconomic imbalances. Regarding the latter, we see chances also for the new target to be exceeded.
Fiscal policy implications: We expect a public budget deficit of 9.5% of GDP this year. The risks for exceeding the new budget deficit target for 2020 are even higher in the context of political tensions and looming elections (local one will take place on September 27, and Parliamentary ones on December 6).

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.