Switching into lower gear or slamming on the brakes?
The economy is facing a soft patch ahead and avoiding technical recession should require well-timed and significant state investments, for which plenty of EU funds are allocated, though bearing the risk of domestic administrative bottlenecks. This is likely to make the difference between swiftly switching into lower gear or a sudden braking. Our baseline scenario is based on ongoing fiscal consolidation in line with targets agreed with the EC and the implementation of structural reforms agreed under RRP, which should boost potential growth, correct the external imbalances, improve social inclusion, avoid negative rating actions in a challenging global environment and, assuming policy consistency is proved, lay the foundation for rating upgrades.
The NBR is done with the rate hiking cycle unless inflation surprises significantly to the upside in the short term or the RON comes under meaningful depreciation pressures, in our view. Though the NBR did not close the door to further tightening, we see asymmetric benefits for an additional 25bp rate hike at the January 10 meeting. If needed to keep RON weakening under control, liquidity management would likely be tightened. Hence, the peak in back-end ROMGBs yields is likely behind us, though spikes could be triggered by potential hawkish surprises from major central banks vs. what the market is currently pricing. Gross funding needs in nominal amount are expected to marginally decrease in 2023 vs. 2022, despite the lower deficit target, due to large redemptions. Hence, ROMANIs are likely to trade with a premium vs. the rating/CDS-implied yields, as the large supply from the issuer (EUR 7-8bn equivalent) is likely to weigh-in for longer.