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Erste: New Fiscal Code will accelerate consumption in 2016 but economy risks overheating

Erste Group modified the estimate referring to the increase of private consumption in Romania in 2016, by 1.1 points to 4.5 per cent as an effect of the package of measures of the new Fiscal Code and warned that one of the risks generated by its implementation is economy overheating.

2015-08-03 12:36:23

According to an analysis made by Erste Group for the period of time 106-2019 referring to opportunities and risks to which Romania's economy is exposed following the relaxation of fiscal policy, private consumption will grow by 4.6 per cent in 2017, 4.4 per cent in 2018 and 4.2 per cent in 2019.

In these conditions, the average advance of consumption will be 4.5 per cent, 1 per cent over the estimate made in the basic scenario of the financial institution. The basic scenario provided an advance of private consumption of 3.7 per cent this year, followed by 3.6 per cent in 2016, 3.5 per cent in 2017 and 3.4 per cent in 2018 and 2019. The risks mentioned by Erste Group as effects of the new Fiscal Code include the possibility that budget deficit may not observe Romania's engagements in accords with IMF and the European Commission of 3 per cent of GDP, a fact which would worsen Romania's relations with international creditors.

For 2016, Erste increased its provision referring to budget deficit of 1.2 per cent provided in the basic scenario at 3.5 per cent. For the next three years, the bank reviewed the estimate from a deficit of 1.1 per cent to 3 per cent in 2017, 2.6 per cent in 2018 and 2.3 per cent in 2019. Over 2016- 2019, the institution anticipates an average deficit of 2.9 per cent of GDP.

Other risks foreseen by Erste are the amendment of Romania's ratings by financial evaluation agencies, the increase of financing costs, the drop of investments due to short term expense adjustment as well as medium term adjustments with contrary economic effects.

In the perspectives of VAT reduction from 24 per cent to 19 per cent, Erste reviewed the estimate referring to inflation in December 2016 to 0.7 per cent while the average inflation rate will maintain slightly negative (-0.3 per cent). VAT reduction will blur inflation pressures in 2016 and we do not exclude the fact that economy may give signs of overheating, the Erste analysis shows.

The bank notes the fact that BNR maintained in July monetary policy interest rate at 1.75 per cent while governor Mugur Isarescu clearly showed that one of the reasons of a prudent reconsideration of the monetary policy is the government program in the fiscal field. Taking into account these facts and next year's general elections, Erste anticipates that BNR monetary policy will be less relaxed.
The additional risks affecting the economy include the government intention to significantly increase wages in the public sector in 2016, the estimated impact over GDP being 1.3 per cent, and the increase of expenses in the military sector by 1 per cent of GDP in 2017. Moreover the Parliament approved on June 30 the reintroduction of special pensions for military employees which will increase pressure on budget.

The positive factors mentioned by Erste Group include the acceleration of economic growth, the increase of private investments, consumption and saving growth and the improvement of credit quality. At the same time, companies will have additional funds and banks will benefit from higher government bond issues in case Romania preserves ratings recommended for investments.
For 2015, Erste Group maintained the estimate referring to Romania's economic growth at 3.2 per cent but for 2016 the prognosis improved from 3.5 per cent to 4.2 per cent. For the following years Erste increased estimates to 4.4 per cent in 2017, 4.5 per cent in 2018 and 4.6 per cent in 2019. In the basic scenario, the Austrian bank foresees increases of 3.8 per cent, 4.1 per cent and 4.3 per cent for 2017-2019. In the case of investments the bank anticipates a 3 per cent advance this year, followed by 4.8 per cent in 2016 from 4.5 per cent. On the overall Erste anticipated an average increase of 5.8 per cent by 0.7 per cent over the prognosis from the basic scenario over 2016-2019.

Romania's GDP grew in the first quarter compared to the same period of 2014, by 4.3 per cent. The 2015 budget was substantiated taking into account a GDP increase of 2.5 per cent. May estimates of the National Prognosis Commission take into account an advance of 3.3 per cent. The European Commission improved its estimate of Romania's economic growth by 0.1 per cent to 2.8 per cent for 2015 and by 0.4 per cent to 3.3 per cent for 2016 because of the solid domestic consumption and investment return, according to the EC spring prognosis.



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