Garanti Bank increases the forecast for Romania’s GDP growth to 4.4 pc this year

Garanti Bank increases its forecast regarding Romania’s GDP growth in 2018, to 4.4 percent, from 4 percent estimated at the end of last year. Just like in the previous year, the economic advance will likely be supported by services, industry and trade, according to the bank’s Quarterly Macroeconomic Report, corresponding to the first quarter of this year.

”Domestic demand continues to be stimulated by the expansive fiscal policy, as the budget deficit is seen at 3.5 percent in 2018. External demand for capital goods needed in production or for durables continues to grow, a path seen in 2017 as well, as the capital stock is being renewed, after having been eroded in the post crisis years,” the report reads.

Garanti Bank also estimates that inflation could end the year at 3.6 percent, cooling from the current 5.2 percent level.

As the economy became overheated, the National Bank of Romania (BNR) hiked the key policy rate 3 times this year, to 2.5 percent and started to sterilize excess liquidity in April.

”We expect inflation to stabilize after the peak reached in H1 18, so further on, we see just one more rate hike by the end of the year, to 2.75 percent from the current 2.5 percent,” Garanti Bank analysts estimate.

Just as in the case of inflation, the largest part of the increase in ROBOR rates has already taken place, with ROBOR 3M hitting 2.7 percent in the first part of May, versus 0.9 percent in the preliquidity squeeze period that started in September last year.

The current account deficit continues to widen, but it should not catch too much speed, as consumption appetite seems to moderate and wages’ growth should be slower in 2018. According to Garanti Bank specialists, the current account deficit continues to be funded by FDI and EU funds for the moment, although this may not be true anymore in the future, especially since in the first quarter FDI dropped compared the similar period of last year and the negative tendency could continue in 2018.

Garanti Bank maintains its expectation for the EUR/RON parity of 4.78 by the end of the year. Other factors such as investor sentiment and reallocation of portfolio flows could play into the equation.

As lending has been picking up, exceeding the euro zone average by end of 2017, Garanti Bank estimates that in 2018 the pace should be sustained. The bank expects an increase in lending to consumers and a moderate advance in companies lending, with the latter showing sensitivity to higher costs and to slower economic growth pace.