UniCredit report: BNR could allow gradual depreciation of RON to 4.70 units per EUR in Q1 2018

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The economic growth above 5% anticipated for 2017 is hiding increasing fiscal imbalances, a quarterly report issued on Friday by UniCredit Bank informs.

“Ad-hoc decisions, tax increases and public investment cuts could keep the budget deficit below 3% of the GDP this year, not in 2018. The increase in private consumption and the low inflow of European funds will lead to capital outflows from Romania. In addition, the wage increases faster than the productivity increase show that the RON would need to depreciate in the coming years,” the authors of the report say, quoted by hotnews.ro.

Several considerations:

  • BNR has increased the deposit facility by 25 basic points up to 0.5% in October, we anticipate a fresh increase of 25 basic points in November, so that in H1 2018 will decide the increase of the monetary policy interest for three times;
  • Economic growth is endangered by fiscal imbalances and external imbalances;
  • Less than 10 years since one of the toughest austerity programmes in Europe, the Romanian Government is making the same mistakes that led to recession in 2009-2010;
  • The tax policy poses the largest risk to macro-economic stability, as the Government implements populist decisions with limited resources; we anticipate a 1.2% revenues increases from taxes this year, despite the GDP nominal increase of 9.9%; wages and social spending might grow in 2017 by 16.6% against 2016;
  • Economic growth might slowdown from 5.3% in 2017 to 3.6% in 2018, on the background of the slowdown of consumption and stocks;
  • The transfer of social contribution from employers to the employee will maintain the pace of wage increases within the interval of 4-40%; the average net wage in the private environment could grow by 6% next year, if the Government forces the private companies to increase the employees’ gross salaries by the equivalent of the social contributions;
  • Wage increases will continue to erode the exporters profit margins;
  • Net capital flows could be negative this year and next year; we anticipate an increase of the goods trade deficit to more than 8%, with a deepening of the current account deficit;
  • The inflows of structural and cohesion funds have decreased to EUR 274 million in the first seven months of 2017 (according to the Finance Ministry) and could represent less than 1% of the GDP this year;
  • The national currency is over-evaluated due to lower capital inflows and to the increases of labour force per unit. The EUR/RON exchange rate could exceed the 4.6 units threshold by year end. We believe that BNR will allow a gradual depreciation of the RON and the transition to 4.6-4.7 units will take place in Q1 2018, at the same moment with the increases of the monetary policy interest;
  • There is the risk of conflict with the European authorities in regard to the fiscal sustainability and on justice independence. The European Commission has several instruments to punish Romania, more than in the case of Poland or Hungary, within the context of the Cooperation and Verification Mechanism (CVM) for judicial reforms.



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