Romania Macro Outlook
The autumn of 2017 brought a series of economic surprises. Real GDP growth exceeded even the most optimistic forecasts in the third quarter due to the outstanding performance of agriculture, and Romania is on its way towards economic growth of around 7% in FY17. On financial markets, the Romanian leu lost 1% in a single day at the beginning of November and went to 4.63, after a statement by the NBR's governor about greater flexibility in the FX rate in the future. This spike in the EURRON came after a long period of stability, with the leu having been capped at 4.60 for several months in a row. Subsequent developments on the FX market were less impressive and the leu has been traded at 4.62-4.65 since then.
A slowdown in 2018 economic growth towards 4% due to less traction from household consumption and the uncertain results of public investments will add pressure on budget revenues. The government has so far unveiled a series of soft measures for keeping the budget deficit below 3% of GDP in 2018, but the associated cost savings seem modest. The government has a deadline of until April 2018 to report to the EC on the specific measures taken to correct the fiscal deviation, so the issue remains open and new fiscal measures are not being ruled out. The inflation rate is expected to rise above the NBR's target in the spring of 2018 due to the base effect associated with previous cuts in taxation and pressure from household consumption. Since inflation will remain at elevated levels until the end of next year, a response from the NBR in the form of a rate hiking cycle is possible. We foresee a total of four rate hikes in 2018, with the first being delivered in 1Q18.