ING expects Romanian Govt. to keep deficit at 3.9% of GDP in 2020 with lower pension hike

ING Bank estimates that Romania’s public deficit will reach 3.9% of GDP this year, slightly above the official target yet well below the 4.6%-4.8% estimate of the Fiscal Council that assumes full enforcement of the 40% pension hike in September.

ING Bank, however, expects the Government to enforce only partial increase in pensions, in order to avoid a downgrade of the sovereign rating into the junk area, local Profit.ro reported.

Romania’s rating is just above the investment grade line and S&P has already downgraded the country's outlook to negative due to the fiscal slippage. Supplementary pressures on the Government toward pursuing fiscal consolidation steps would be taken under the Excessive Deficit Procedure that ING Bank sees as imminent by the middle of this year. In fact, the Liberal government has already started to back off with pension increases - prime minister Ludovic Orban having already said that this will be done only if financial resources are available.

“The key [for the impact on the growth rate posed by the focal consolidation policies] is the pace of deficit reduction that the European Commission will request. A quick correction will most likely be achieved by abruptly reducing spending and will have a shrinking effect on the economy. If allowed, the Government will prefer a more gradual adjustment,” ING Bank’s analysis points.

ING forecasts a significant slowdown in economic growth to 2.6% in 2020, from 3.6%-3.7% in 2019, well below the official 4.1% official forecast. ING also warns of contraction in the industry and estimates that the growth in domestic consumption will stabilize at a moderate level but will continue to be the main contributor to the GDP expansion.

The local currency would weaken slightly to RON 4.85 to EUR. The re-alignment of the exchange rate toward weaker national currency, over RON 4.8 to EUR, would be synchronized with a political event, such as the opening of the procedures for early parliamentary elections, ING Bank predicts.

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