Macro: COVID-19 Update Romania: Skating on thin ice funding the large public deficit

Growth outlook/sectoral impact: Due to further worsening in the economic environment we further downgrade our real GDP forecast for Romania in 2020. The effects of this downturn are widespread through the economy, and the private and public sector are ill suited to avoid a contraction. Bankruptcies and the sharp rise in unemployment will have a lasting effect on the economy of Romania in the years to come.
Inflation and monetary policy: Similar to other monetary authorities in the regions, the National Bank of Romania stepped in and announced several bold measures to ease the fall of the economy. The key rate was cut and the NBR started to purchase RON denominated government securities, which is unprecedented. Further steps are likely in the next months, due to the ongoing developments. The measures taken by the National Bank lead to depreciation pressure on the exchange rate. The inflation rate could fall rapidly, although there are several upside risks to the inflation outlook.
Fiscal policy: The public sector will also endure a deep hit, due to falling revenues and great increase in expenses due to softening measures for the economy. Given the already very large public budget deficit, the government has limited tools to prop-up the economic recovery starting in the second half of the year. It will be hard to curb the increase of public expenditure, as much of these are fixed. Therefore, we revise the public deficit forecast upwards, with risks to the upside. We expect the announcement of a clear fiscal consolidation plan in the near term, also to preserve the sovereign rating. Should the funding sources from the QE program from the NBR not be enough to cover the public deficit, then borrowing money from the IMF and the European Commission is the only remaining alternative to close the funding need.


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.