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Romania to see the highest growth rate in Europe, according to a revised International Monetary Fund forecast.
The International Monetary Fund (IMF) has revised its April forecast for growth in the Romanian economy up from 4.2% to 5%. According to the Fund, this year Romania will have the highest growth in Europe, followed by Ireland with 4.9%. They estimate that this peak will be followed by a slowdown to 3.8% in 2017. The Governor of the National Bank Mugur Isarescu explains:
"We can achieve a faster pace of economic growth. I want to be clear in this respect. I don't think Romania should stop at 3 or 4%, but, in order to be sustainable and not create problems, this higher pace should be obtained by action over the factors that lead to maximising the potential of the economy to grow faster. However, given that the Romanian economy's potential for growth is affected by a slow recovery in public investment and structural reform, action should be taken with priority to remedy the problems that prevent rapid progress in these two areas."
The president of the National Forecast Commission Ion Ghizdeanu said that the new fiscal code that came into effect last year did not only reduce the VAT, but also provided support for businesses and investments. In his opinion, there are several aspects that prove the sustainability of economic growth:
"The second quarter indicates, with its 6% growth [as compared to the same quarter last year], three or four elements that demonstrate the sustainability of the growth. The first is the fact that, at 10%, the dynamics of investment was higher than that of consumption. The growth was higher for private investments. The second element is that for the last two months we have not imported as much for consumption, we produce more for consumption, and for the last two months we have had higher growth in exports than in imports, also due to the private sector. The third factor is confidence. Any confidence indicator from us or from the European Commission shows that confidence in the business environment in Romania is among the highest in Europe. This can also be seen in terms of jobs. Without good prospects, I don't believe that a business or an entrepreneur would commit to hiring more personnel. These are several elements that make me think this growth rate is sustainable and may come close to 5% this year. In any case, in the medium term, every calculation, including those from the European Commission, leads towards the 4% threshold. We believe that we will hold on to the 4% rate for several years."
Let us also note that the rating agency Standard & Poor's has recently affirmed Romania's short and long term sovereign rating for local and international currencies, at BBB minus, with a stable outlook, while warning that the government's relaxed fiscal policy may lead to a higher fiscal and external deficit. Standard & Poor's says it expects a worsening of the deficit up to 3.5% of the GDP in 2017 because of the new round of VAT and excise cuts scheduled for next year.
Public Finance Minister Anca Dragu, however, said that Romania would not go over 3% in terms of the budget deficit neither this year, nor the next, and would even start gradually reducing this indicator:
"As our forecasts for next year show, the budget deficit is under 3%, it is somewhere around 2.8%. This year we have 2.95%, therefore this gradual process of consolidation has started. It is true that European Commission estimates show a slightly higher deficit, but the gap comes from a difference in the macro-economic framework. In our estimates, the budget deficit for next year will be somewhere around 2.8%, maybe 2.85%, after the application of the latest Fiscal Code [to reduce the VAT from 20 to 19%]. Of course, this does not take into account the 5% cut in social insurance contributions when forecasting the budget deficit for next year."
Standard & Poor's says it could improve Romania's rating if budget consolidation is pursued and sovereign debt starts decreasing. At the same time, Romania's rating could worsen if a reversal of policies will cause a significant deterioration of the government deficit, debt and borrowing costs, or if external unbalances appear.
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