Romania Country Report Apr17 - April, 2017

May 12, 2017

Romania’s macroeconomic outlook improved but the growth rates of around 4% expected by independent analysts could be compromised by risky fiscal policies embarked by the government in their attempt to boost the growth significantly above the potential growth.  The 3.5% budget deficit projected for this year by the European Commission might be acceptable if aimed at financing infrastructure works able to sustain future growth. But the absorption of EU funds, one of the main financing source for such projects, is sluggish and no money under the 2014-2020 financial programming reached the final recipient yet. The gross fix capital formation last year and the EC’s projections for this year are disappointing. Furthermore, the deficit might widen by another 2% of GDP in case the government endorsed the public wage bill drafted by the labour ministry.

The political balance is not at risk, but the senior ruling party faces internal tensions among its wings. There are visible disagreements between members of the government and ruling majority’s head Liviu Dragnea. Amid weak opposition, the ruling coalition developed internal rivalries fueled by the expected resignation of Dragnea in case court issues a sentence for him in the case scheduled for completion this year.

The main risks remain the two projects: on the public wage law and on the household income tax. The former might feasible if significantly revised and agreed with the trade unions, but the latter create chaos but hopefully is rather unlikely to see the final endorsement from Parliament.

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