Goldman Sachs on Romania: positive short-term outlook, risky in the medium term

Goldman Sachs, the largest US investment bank, has issued a note to its clients indicating a positive short-term outlook for Romania, but warning that risks remain in the medium term due to the current account deficit and inflation.

According to a Goldman Sachs document on emerging markets analyzed by Profit.ro, Romania is in a stage of moderate economic activity, but with strong wage increases. The economy slowed down in the second half of last year, in line with the general behavior of countries in the region, but the labor market was robust, with annualized average increases of 13% in employee incomes.

Inflation has recorded a sharp decrease, but inflationary pressures remain high. The National Bank of Romania expects a decline in the dynamics of prices for the coming months, with positive contributions from energy and food prices.

Still, Goldman Sachs bankers expect the National Bank of Romania to maintain the interest rate at 7% throughout 2023 to control inflation.

The documents highlight that the current account deficit is 9%, but unlike those of the Czech Republic and Hungary, which are also high, Romania's appears to be structural, given that the country is largely energy independent due to domestic oil and natural gas production capabilities. Financing the large external deficit appears quite secure now, given the EU transfers equivalent to 4-5% of GDP, and foreign direct investments which normally add 2% of GDP.

"In any case, Romania's large current account deficit remains the primary risk for Romania in the medium term," says Goldman Sachs' note to investors.

The country’s budget deficit is 6%, but the government has committed to reducing it to 4.4% this year and to 3.0% in 2024. However, there is widespread skepticism, including at the central bank, that these targets will be met.

The Goldman Sachs analysis also makes notes of the fact that 2024 will be an important year for elections, with parliamentary, presidential, local, and European parliamentary elections all taking place.

"Failure to reduce the fiscal deficit will add to both fiscal and external risks," says Goldman Sachs.

Analysts also point out that the National Bank of Romania operates a floating exchange rate but has indicated that it favors greater exchange rate flexibility over time. The Romanian currency is overvalued by 5-6%, according to the central bank's estimates, which has recently tended to resist depreciation risks, but expects a weakening of the currency to occur over time.