Solid growth fails to offset risks

In its Spring 2017 Economic Forecast, the European Commission points out that Romania’s real GDP growth is projected to reach 4.3 percent at the end of the year, while the current account deficit is expected to widen further “due to strong domestic demand and import growth.”  “In 2017, the general government deficit is projected to further deteriorate to 3.5 percent of GDP … The 2017 budget contains large increases of public wages and social benefits, including an additional pension increase of nine percent, on top of the standard indexation, which is scheduled for July 2017. The deficit is projected to further widen to 3.7 percent of GDP in 2018,” the EC’s forecast reveals. “The main risk to the outlook is the possibility of further fiscal stimulus, which may boost domestic demand in the short-run, but at the expense of the sustainability of public finances. The delay or absence of structural reforms to support competitiveness gains may have a downward effect on export growth and in turn worsen further the external balance.”  In addition, the EC warns that the draft unified wage law poses “a significant risk to the fiscal forecast, with a potential impact on the general government balance of up to -2% of GDP in 2018.” 
In turn, a recent IMF report points out that Romania is expected to reach a 4.2 percent growth in 2017, “supported by continued stimulus to private consumption from a new round of fiscal relaxation and wage increases.” Analyzing potential risks, the IMF’s report adds: “The main risks to the economic outlook include a perception of weakening fiscal prudence or institutions, which could adversely affect market confidence. This, together with heightened political tensions, could erode consumption and investment, increase the cost of government borrowing and put pressure on the exchange rate which would affect banks’ balance sheets through their FX exposures.”
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