Macro: COVID-19 Update Romania: Large public deficit limits the room for manoeuvre

Corona Containment measures: A tight control of the borders has been imposed, people coming from abroad are quarantined. Schools, universities and restaurants are closed. Social distancing and work from home encouraged by the government. Events with more than 100 persons are restricted, indoor events at 50 persons. Growth outlook/sectoral impact: Economy started 2020 on a strong foot. However, starting from March the first effects of the coronavirus outbreak could be felt. The real GDP might fall sharply by 7% qoq in Q2. Economic activity will likely take a strong hit due to the supply chains disruptions and effects of social distancing, especially in production, retail, leisure, hospitality and transport. However, a recovery is expected in the second half of 2020. Overall we expect a decline of economic growth by -2.5% in 2020. Inflation and rates/monetary policy: CPI forecast revised downwards to 2.3% from 3.0% previously, mainly driven by lower oil prices. However, price and VAT increases might offset the pressures fuelled by depressed demand. With the ECB and other central banks in a hurry to ease the monetary policy stance, the Romanian Central Bank (NBR) is likely to follow suit. However, the room for a rate cut is limited by the macroeconomic imbalances. Therefore, a limited rate cut of only 50bp cumulatively is likely. Our base case scenario for the exchange rate is only a moderate depreciation. Fiscal policy: Limited room for fiscal stimuli due to recent increase in the budget deficit. Room for the government to rationalize public expenses is also limited as discretionary spending is low. In order to limit the negative impact of the crisis, the government will provide state guarantees to companies and will fully subsidize the borrowing costs for one year. Covering the gross public funding needs should not be a problem on the short run. We think that with all these measures the budget deficit might rise to 7% of GDP in 2020.

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.