UniCredit Bank: Romania’s economy could be reduced in 2020 by approximately 5%

Romania’s economy could be reduced in 2020 by approximately 5% and the coming back next year could be, probably, partial, shows the quarterly report of UniCredit Bank.

‘According to our basic scenario, pensions will be increased by 14% in 2020, and the budgetary deficit could increase up to 9.5% of GDP, the support package for the surpassing of the crisis getting to 6% of GDP. The reduction of the budgetary deficit under 5% of GDP next year and the keeping of the debt under the level of 50% of GDP will need a restrictive fiscal policy.BNR could reduce the monetary policy interest down to the level of 1%. The PNL is a favourite in winning the parliamentary elections’ the quoted document says.

According to the source, Romania is getting close to the end of the present electoral cycle, and the parliamentary elections are programmed for the date of 6th December and the PNL is a favourite.

‘In the local elections which took place on 27th September, PNL managed to win local and county councils in the areas previously dominated by PSD and the alliance USR PLUS was confirmed as the third party in urban areas. In December, PNL could replace the present minority government with a governmental alliance which could include USR-PLUS, the PMP of the former president Traian Basescu and the UDMR.A clear victory of PNL could leave USR Plus outside the government, but this scenario seems little probable at the moment of the publication of this report. In the meantime, the PNL government has difficulty in trying to stop the increase of pensions at 14% this year. A verdict of the CC ( the Constitutional Court) is expected before the mid-November’ the report says.

According to the economists of the bank, the budgetary deficit of this year could be lower in case a part of the fiscal reserve are used to finance certain expenses, the estimate of the Fiscal Council placing the deficit at 8.6- 9.4% of GDP.

‘Until now, the measures for support implemented by the government which include exemption from taxes and direct help for the employees in technical unemployment, for needy households and for SMEs are worth almost 2% of GDP. Moreover, the programmed for the guarantee of loans for SMEs surpassed 12 billion lei ( the equivalent of 1.2% of GDP) until the end of August. Other programmes, including those of support of the activities of leasing and factoring for the big companies whose activity was affected by the pandemics, will start in the last quarter of this year.At mid-September the minister of public finances Florin Citu estimated that the lines of support under evolution were 61.8 billion lei (6% of GDP).Some measures were extended. For example, the employees and the self-employed whose activity was affected by COVID-19 can benefit from support for technical unemployment until the end of the year. In our opinion, the government could be able to keep the programmes for direct support beyond the end of the year’ the report says.

‘In our opinion, expenses with salaries in the public sector will have to be kept at the level of 2020, and transfers will have to be reduced towards the level of 2019 in case pensions will be increased again with at most 8%. The limitation of the deficit up to 5% of GDP would keep the public debt under 50% of GDP and under the average of public debt of the countries with rating BBB. As a result, Romania could be kept in the category recommended for investments’ the report says.

In his turn, Dan Bucsa, head-economist for Central and Eastern Europe in the UniCredit Bank London appreciated that the European currency could be worth 4.9 – 5 lei at the beginning of next year, mentioning that the leu is over evaluated as compared to the currencies in Central Europe.

‘As you know, I have my theory that every year the leu moves by 10 bani. This has been the same for years. And probably it will move this year as well. In the basis scenario, somewhere at the beginning of next year, that this is what happens usually, the leu could move in the interval 4.90 – 5. Is it sufficient? No. If we have a scenario with a risk, then the leu could go temporary over 5. Everything the National Bank should do is notto intervene enormously to protect it in this situation and will go smoothly over 5. But probably, after that, the Central Bank will bring it back to the interval, as they watch inflation, they also watch those who got loans in foreing currency’ Dan Bucsa said in a discussion online on the theme ‘ Romania at the end of the electoral cycle: lessons of 2020 for 2021’.

Dan Bucsa said that there are two criteria to watch, one being adjusted with production prices and in this case the leu is over evaluated against the currencies in the countries in Central Europe by 5-12%. If the model is adjusted with the unitary cost of workforce, the over evaluation is against the currencies in the area by 10 -33%.