Romania Country Report Jun17 - June, 2017

July 17, 2017

Lack of fiscal predictability and the weak absorption of EU funds are the major threats in terms of macroeconomic stability. The situation has deteriorated in this regard during June, when the autocratic leader of the Social Democratic Party (PSD) Liviu Dragnea replaced Prime Minister Sorin Dragnea and a couple of ministers with a more loyal members of the party. But while politically it is pretty clear the logic of the move, the economic doctrine of PSD remains very unclear. After replacing the ruling strategy inked ahead of the general elections last year with a new one in June 2017, Dragnea abandoned plans for the most radical (and unsustainable) fiscal innovations such as the corporate turnover tax or household income tax. However, the unified public wage bill, expected to have a major impact on the budget, was endorsed by lawmakers and promulgated by President Klaus Iohannis. But plans for re-arranging the social security contributions might seriously alter the substance of the unified public wage bill, possibly prompting protests from the trade unions early next year.

As regards the real economy, the may figures are quite bright -- but they should be regarded as part of an April-may average due to Easter celebrated this year in April (as opposed to may in 2016). But even so, the industrial growth remains robust, driven by exports. The trade and current account gaps are not yet a concern.

The budget deficit, at some 0.8% pf GDP (unofficial data) is also in the moderate area. But the weak use of EU structural and cohesion funds reflect the lack of public investments (large infrastructure projects), with a negative impact on the potential growth seen broadly at 3.5%.

Speaking of GDP growth, the statistics office confirmed the 5.7% y/y advance in Q1. Among the most notable revisions compared to the first Q1 GDP estimate issued on June 7, domestic consumption, particularly private direct consumption, was revised upward.Romania’s state forecasting body CNP maintained its optimistic growth scenario in its Spring Forecast issued on April 21. GDP will grow by 5.2% this year, 5.7% in 2018 and by even higher rates in 2019-2020.


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