Growth: The release of detailed GDP growth data for the third quarter of 2023, as well as optimistic high-frequency data for the fourth quarter, suggest resilient growth in Romania. For 2024, we will likely see a rebalancing of growth drivers from investment to consumption, although the former is still expected to maintain near double-digit growth. However, with public wages expected to remain in double-digit growth and pensions expected to increase by 13.8% from January 2024 and around 22.0% from September 2024, the consumption situation private sector should improve markedly. We maintain our GDP growth estimate for 2024 at 2.8%.
Inflation: Growth trends could complicate the decision-making process of the National Bank of Romania (NBR), as growing demand, corroborated by a general increase in taxes, could slow down the disinflationary process. Nevertheless, we remain at the lower end of inflation estimates for 2024, as we forecast inflation of 4.7% in December 2024, with downside risks. We also maintain our long-held view that the NBR will begin lowering its policy rate in the second quarter, with a total easing of 150 basis points by the end of 2024.
Tax: Reducing the budget deficit continues to be the main headache for Romanian governments and there is no sign that this will change anytime soon. Initial estimates show the deficit for 2023 at around 5.7% of GDP, similar to the 2022 level and far from the initial target of 4.4%. Furthermore, the 2024-2026 budget strategy does not envisage a budget deficit close to 3.0% of GDP, with official estimates for 2026 now being -4.2%. Thanks to a more favorable repayment schedule, financing needs in 2024 are expected to be better than in 2023 (see here for more details). We view the target of a deficit of 5.0% of GDP for 2024 as ambitious, but not unrealistic. However, negotiations with the European Commission on the pace of deficit reduction could still bring some changes to the plan.
Policy: A super electoral year is expected in Romania, with European, local, general and presidential elections expected to take place within 6 to 7 months. The basic scenario is that the current grand socialist-liberal coalition will continue to form the government after the elections, although the balance of power will likely tilt more in favor of the socialists.
Notes (Baa3/BBB-/BBB-): We continue to see no change in Romania’s Investment Grade rating for the foreseeable future (approximately 2 years). The recent budgetary slippage and the announced increase in pensions could tip the balance of risks to the downside, but we believe that this is unlikely to change the situation, at least as long as Romania’s relations with the EU (and EU money) remain strong.
Next scheduled exams: March 1 – Fitch; March 29 – Moody’s; April 12 – S&P