EBRD cuts growth forecast for Romania and points to its high external vulnerability

The European Bank for Reconstruction and Development (EBRD), in its Regional Economic Prospects report, singles out Romania, besides Jordan, Tunisia, Turkey, the West Bank and Gaza, among the countries it covers, for the deterioration in its external position reflecting higher food and energy import bills and rising interest payments.

The country’s external financing requirements (short-term external debt and the current account deficit) are estimated at 20% of GDP, while its current reserves were only around 15% of GDP as of the end of the third quarter of 2021.

Also, Romania’s population is more vulnerable to the rising food and energy prices because of the high shares held by these categories in households’ consumption basket, the Bank points out. Government’s efforts to address such issues complicate the fiscal consolidation mission.

”The government has adopted a range of measures to support vulnerable households and firms affected by the war. As such, the fiscal consolidation envisaged for this year could be constrained by these expenses and by weaker economic growth,” the EBRD commented.

The EBRD has reduced the forecast for Romania’s economic growth this year to 2.5% (with risks tilted to the downside and contingent on the evolution of the war and other supply pressures), somewhere between the official 2.9% target and the more moderate consensus forecast. More importantly, the Bank believes Romania’s economy will rise by only 3% in 2023 - a 1.2pp downward revision compared to March and well below the 4.4% official expectations.

“In 2023, lingering inflation pressures, fading pent-up demand and supply chain issues are expected to restrain growth to a forecast 3.0%,” the EBRD explained.

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