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Romania Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

Impressive headline growth figures in Q216 support our view that Romania is set to be a regional outperformer over the next two years. Growth in Romania will be driven by robust private consumption and fiscal stimulus in the run-up to the November 2016 general election. Fixed investment will only marginally contribute to growth over the coming years, as EU structural funds decline. Romania's current account deficit will widen over the next two years as rising wages boost imports while eroding export competitiveness. External financing will be met through stable investment inflows and sovereign debt issuance as the government looks to capitalise on record low yields. Romania's budget deficit is set to rise over the next two years due to tax cuts and expenditure increases. With strong domestic demand growth exerting upward pressure on prices, inflation will move towards the central bank's target rate of 2.5% in 2017, resulting in a monetary tightening cycle commencing in H217. No party will gain an outright majority following the 2016 general election in Romania and a PSD-led coalition government is the most likely outcome. Irrespective of the eventual result, fiscal consolidation and tackling corruption will be the government's priorities.Major Forecast Changes We have upgraded our 2016 real GDP growth forecast for Romania to 4.2%, from 4.1% previously.

Table Of Contents

Romania Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Household Consumption To Remain Primary Growth Driver.....................................................................................................8
While Romania will be a regional outperformer over the next two years, real GDP growth is set to ease somewhat in 2017 as a number
of cyclical factors fade. Private consumption will be the main driver of growth over the coming years amidst a lack of alternative
drivers.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................11
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................11
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook.................................................................................................................. 12
Expansionary Fiscal Policy Set To Continue.............................................................................................................................12
Romania's budget deficit is set to rise over the next two years due to tax cuts and expenditure increases. Strong growth rates, low
borrowing costs and expected fiscal consolidation efforts under the next government will prevent a significant rise in sovereign risk. That
said, pursuing an expansionary fiscal policy in an environment of strong growth raises the risk of overheating and represents a missed
opportunity to boost fiscal buffers.
Structural Fiscal Position........................................................................................................................................ 13
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................14
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................14
External Trade And Investment Outlook................................................................................................................ 15
Rapid Wage Growth Driving Current Account Deficit................................................................................................................15
Romania's current account deficit will widen over the next two years as rising wages boost imports while eroding export
competitiveness. External financing will be met through stable investment inf lows and sovereign debt issuance as the government looks
to capitalise on record low yields.
Outlook On External Position.................................................................................................................................. 17
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................17
TABLE: TOP 5 EXPORTS.......................................................................................................................................................................................17
TABLE: TOP 5 IMPORTS........................................................................................................................................................................................18
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................18
Monetary Policy........................................................................................................................................................ 18
Monetary Tightening To Commence In 2017..............................................................................................................................18
Inflation in Romania will turn positive in Q117, when the disinflationary impact of successive VAT cuts and low energy prices fade out.
With strong domestic demand growth also exerting upward pressure on prices, inflation will move towards the central bank's target rate
of 2.5%, resulting in a monetary tightening cycle commencing in H217.
Monetary Policy Framework.................................................................................................................................... 20
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................21
Currency Forecast.................................................................................................................................................... 21
RON: Growing Interest Rate Differential To Drive Appreciation...............................................................................................21
The Romanian leu will appreciate against the euro over the next two years, as growth outperformance, interest rate differentials and
ECB easing increase demand for RON-denominated assets.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................22
Chapter 2: 10-Year Forecast................................................................................................................... 25
The Romanian Economy To 2025........................................................................................................................... 25
Major Untapped Growth Potential................................................................................................................................................25
While Romania will struggle to return to pre-crisis growth rates over the next decade, we believe the country's economy has significant
regional potential. We forecast 10-year real average annual growth of 4.0 %, with the country's competitive labour force likely to drive
growth and attract investment over the next few years, despite ongoing political inefficiencies and the modest pace of the eurozone
economic recovery.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................25
Chapter 3: Political Outlook................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
BMI Political Risk Index........................................................................................................................................... 27
Domestic Politics..................................................................................................................................................... 28
Election Preview: PSD-Led Coalition Most Likely......................................................................................................................28
No party will gain an outright majority following the 2016 general election in Romania and a PSD-led coalition government is the most
likely outcome. Irrespective of the eventual result, fiscal consolidation and tackling corruption will be the government's priorities.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................28
Long-Term Political Outlook................................................................................................................................... 31
Progress Ahead Amidst Geopolitical Uncertainty.....................................................................................................................31
The strength and quality of Romani a's political institutions fall short relative to much of Europe, implying significant challenges ahead
despite the progress made since the fall of communism. With membership of the euro still looking like a distant prospect, there is a risk
of relative institutional stagnation, which could jeopardise some of the improvements made over the last two decades.
Chapter 4: Operational Risk................................................................................................................... 35
SWOT Analysis......................................................................................................................................................... 35
Operational Risk Index............................................................................................................................................ 35
Operational Risk....................................................................................................................................................... 36
TABLE: ROMANIA AND EMERGING EUROPE - OPERATIONAL RISK...............................................................................................................36
Market Size And Utilities.......................................................................................................................................... 37
TABLE: EMERGING EUROPE - MARKET SIZE AND UTILITIES RISK................................................................................................................37
Labour Costs............................................................................................................................................................ 41
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 42
Chapter 5:BMI Global Macro Outlook.................................................................................................... 45
Global Macro Outlook.............................................................................................................................................. 45
EMs Past The Worst, But Structural Problems Persist.............................................................................................................45
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................45
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %..................................................................................................................................46
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................47
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................49

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