Romania Chartbook: Mildly tougher times

- We see real GDP growth slowing to an average of 4.5% this year (consensus sees it at 4.1%), down from 6.9% in 2017, but still driven primarily by household consumption and investment.
- Inflation is currently above the central bank’s tolerance band. We expect it to remain above target over the next two years, as does the central bank itself. Both producer price selling expectations and consumer inflation expectations have risen sharply in recent months. Consequently, we see the policy rate rising to 2.50-2.75% by the end of the year. However, this remains well below the average historical policy rate (5.0% over the last 10 years).
- We see the 10-year yield on an upwards trajectory, as domestic monetary policy tightens further, and anticipation for an ECB rate hike builds.
- Wage growth is in double figures but productivity gains are lagging behind. The unemployment rate is trending around an all-time low, although surveys do not currently cite labour as a major factor limiting production. That said, hiring intentions remain relatively flat.
- Lending growth is beginning to decline, in line with the start of the tightening cycle, and FX loans as a percentage of GDP have been falling since 2012, implying that a depreciation of the RON should not have systemic implications, but will hit consumption via the fairly common EUR-linked rents. Interest rates on local currency loans have begun to rise.
- If wage growth slows to only 6% in the next few years, debt-servicing costs (as a % of wages) on a house purchased in 2017 will rise, according to our rough calculations.
- With nominal GDP growth of 8.3% this year, the 2018E budget leaves the fiscal deficit flirting dangerously with the 3% of GDP ceiling allowed by the Maastricht Treaty. The problem is not acute now, but could become challenging should the economic downturn become more pronounced. On the balance of payments side, we expect the current account deficit to widen to 4.2% of GDP, implying tight BoP funding on a continuing mild depreciation bias for the RON.