Capital Economics sees Romania’s CA gap at 8% of GDP this year; exchange rate under pressure

High oil prices will push Romania’s current accounts (CA) into an alarming level of 8% of GDP this year (roughly EUR 20 bln), keeping the exchange rate under pressure, Capital Economics warns in a piece of research dedicated to the assessment of the impact of the war in Ukraine on the central and East European economies.

Romania’s CA deficit reached 7% of GDP in 2021, and it widened significantly to 7.4% of GDP (EUR 17.8 bln) in the 12 months to January 2022.

The Government, in its February forecast pre-dating the war in Ukraine indeed, expressed hopes for a smaller CA gap this year, namely 6.7% of GDP (or EUR 17.7 bln).

But the Government was also expecting 4.3% GDP growth, while Capital Economics (as well as other independent analysts) slashed the projections to 3.5% or below.

The CA widening implied by Capital Economics’ forecast is not dramatic compared to the country’s current CA deficit.

Normally, such external deficits would prompt balance of payment corrections via exchange rate - but the robust inflows expected under the capital account (Relaunch and Resilience Facility) are likely to help the National Bank of Romania continue to manage the exchange rate that has so far remained surprisingly stable compared to peers in the region.

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