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Romania's economy to contract by 4.7%, deficit to reach 7.3%/GDP in 2020 due to COVID-19 crisis - Erste

Romania's economy to contract by 4.7%, deficit to reach 7.3%/GDP in 2020 due to COVID-19 crisis - Erste Romania GDP, budget

BUCHAREST (Romania), March 26 (SeeNews) - Romania's economy is expected to contract by 4.7% in 2020, while the consolidated budget gap is expected to jump to 7.3% of the gross domestic product (GDP) due to the coronavirus outbreak, Erste Bank said.

"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," Erste Bank said in an analysis on Wednesday.

Romania's second quarter GDP could shrink by 15.2% on the quarter, while first quarter is expected to post a 0.5% quarterly contraction, analysts said. A recovery is expected in the third quarter, when GDP is expected to jump by a quarterly 12.8%.

The recovery is likely to continue in 2021, when Erste analysts expect Romania to post an annual 3.9% GDP growth, benefiting also from favourable statistical base effect and assuming some fiscal consolidation partially offset by accommodative monetary policy stance.  

According to the report, the sharp deterioration of the growth outlook should increase budget shortfall. "Adding things together the fiscal gap could reach 7.3% of GDP this year. Risks are titled towards a wider budget deficit. In this scenario, debt-to-GDP ratio could rise by 6.1ppt to 41.5% assuming that the government taps its FX buffer," the analysts said.

Erste also revised Romania's end-2020 CPI forecast to 2.8% from 3.4%, mostly due to the steep drop in the oil price, but also due to the significant one-off demand shock. 

"It looks challenging for the NBR 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. An expected correction of the current account deficit this year should also help alleviate the weakening pressure on the currency," analysts said.

Romania's central bank, BNR, on Friday cut its monetary policy rate to 2.0% from 2.5%, effective March 23, as part of a package of measures aimed at mitigating the impact of the coronavirus crisis on households and companies.

The euro/leu pair is seen trading at 4.90 by year-end, slightly higher than the previous forecast of 4.87, Erste said.

Erste also said that Romania runs at a greater risk of having its credit rating downgraded due to COVID-19 crisis.

In December,  Standard & Poor's revised the outlook on Romania to negative from positive because of rising fiscal and external deficits, while maintaining rating at BBB-/A-3.

Fitch last reviewed Romania in November, when it has affirmed its long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with stable outlooks.

(1 euro=4.8345 lei)