Romania Monthly Focus: Let’s call the duck, a duck
|It's actually a sitting duck and it refers to Romania's fiscal stance, which is at risk of being significantly derailed from its short-term targets, after having breached its medium-term objective since 2016. Ourselves as well as the larger local macro analyst community, along with the European Commission, the Fiscal Council and Romania's central bank have repeatedly warned about Romania's fiscal policy being pro-cyclical and hence prone to risks of falling in the Excessive Deficit pit (i.e. breaching the 3% budget deficit ceiling) should the economic cycle turn, but the recent events and current circumstances are such that an EDP accident has for us become part of the baseline scenario for the next 2 years. There are several factors at play in this scenario, most of which we would have played down as general risks were not for the heavy electoral calendar that lies ahead of us, which makes it considerably less likely that fiscal adjustment measures will be taken.
That is a problem, especially in the context of the recently adopted public pensions law, which envisages a heavy social spending bill already in the next 2 years.
Chart 1: General consolidated budget deficit estimates vs. target in absence of compensatory measures (ESA2010 terms, % GDP).
As seen in Chart 1, we envisage that, without any financing measures being taken by the government, only the pension point increases enshrined by the pension law should lead to a budget deficit of 4.0% of GDP in 2020 and 5.4% of GDP in 2021. This is even before accounting for likely increases in the number of pensioners and before taking account of the changing methodology for calculating public pensions, which according to authorities' claims, should lead to more generous retirement benefits.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.