Erste Group Sees Romania GDP Growth Contracting 4.7% in 2020

Consequently, Romania's public debt is seen rising from 35.4% of GDP in 2019 to 41.5% in 2020.

“The Covid-19 crisis is likely to lead to a large, short-lived, structural break in economic data series. It is likely to see a double-digit quarterly drop in real GDP growth in the second quarter, followed by a double-digit recovery in the next quarter helped by the huge fiscal and monetary stimulus domestically and abroad. For the whole year, we estimate a contraction of -4.7 this year. This will deteriorate the already weak public finances with budget deficit likely to widen to -7.3% of GDP,” the report noted.

Erste Group has revised its end-2020 CPI forecast to 2.8% from 3.4% previously, mostly due to the steep drop in the oil price, but also incorporating a significant one-off demand shock.

Recovery is likely to be initially sharp given the very supportive fiscal and monetary conditions both domestically and abroad aimed at reducing as much as possible the duration of the demand shock.

The full recovery will take a few more quarters as some companies will not survive the shock and for others it could take time to get to full capacity and for rehiring process. Hence, unemployment is likely to be sticky and the full recovery of the jobs lost could take more than a year, the report noted.

The central bank seems committed to use “whatever it takes” to support a swift post-crises recovery and interest rates should fall further driven by ample liquidity conditions and more rate cuts in sync with the regional central banks. It looks challenging for the central bank to manage the currency while injecting more liquidity via quantitative easing. We believe that the central bank has the firepower to get over the current crisis, Erste analysts noted.

An expected correction of the current account deficit this year should also help alleviate the weakening pressure on the currency.

Erste sees the three-month interest rate in the 1%-1.5% area versus 3% previously and EUR/RON at 4.90 by year-end, slightly higher than previous forecast of 4.87. It sees the current account deficit narrowing to 3.5% this year versus 4.7% of GDP in 2019.

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