Boston, MA -- (SBWire) -- 06/14/2013 --Core Views
We forecast the Romanian policy interest rate to hold steady at 5.25% for the remainder of 2013, as the National Bank of Romania (NBR) remains wary of lowering rates in view of rising inflationary pressure. With inflation ticking up by 5.9% year-on-year (y-o-y) in January, we expect headline consumer inflation to remain above the NBR's target rate of 2.5% +=1.0% in 2013, forecasting inflation to average 4.4% over the course of the year.
We anticipate Romania's fiscal deficit to narrow to 2.3% of GDP in 2013, but caution that the drive to wards fiscal balancing will be made more difficult by the ongoing crisis in the eurozone and domestic opposition to fiscal austerity.
Political instability will continue posing some problems for Romania over the next few quarters, despite the landslide victory of the Social-Liberal Union in the December 9 parliamentary elections. In particular, we expect persistent corruption allegations, the strained Ponta-Basescu relationship, and ongoing austerity to weigh on the country's political outlook.
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Major Forecast Changes
Weak domestic demand and reasonably strong export growth in Q412 has prompted us to revise our current account deficit forecast to 3.8% of GDP for 2013 and 3.4% for 2014, from 4.0% and 3.6% previously. While Romania's current account deficit looks stable, we believe the country's precarious international investment position could pose some risks to the balance of payments in H113.
While Romania's nominal fiscal deficit narrowed in 2012, we have amended our forecast for the budget deficit to be 2.3% of GDP in 2013 and 1.9% in 2014, from 1.5% and 0.6% previously, as planned increases in public spending slow the pace of fiscal consolidation over the next few quarters.
With leu strength in Q412 indicating that the currency is likely to trade in a lower range in 2013 than we had previously indicated, we have revised our average leu exchange rate forecasts to RON4.4000/EUR in 2013 and RON4.4400/EUR in 2014, from RON4.6000/EUR and RON4.6500/EUR previously.
Risks To Outlook
A more pronounced slowdown in eurozone growth would be likely to have a negative effect on Romania's growth trajectory. Owing to the high degree of trade integration with eurozone countries, Romania's economic recovery remains highly dependent on external demand remaining relatively receptive to its exports.
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