Forecasts Regarding Romanian Economy

The Romanian Finance Minister Anca Dragu says that Romania’s economy will grow by 4.2% this year, a figure close to the estimates made by the European Commission, and by an average 4.5% in 2017, 2018 and 2019, despite the fact that international financial institutions have revised downwards their estimates regarding the growth of the Romanian economy in the coming years. The Finance Minister has explained that, usually, international institutions’ forecasts are a bit more pessimistic for longer timeframes.

“A forecast made now for the next year has many unknown elements attached to it. Our forecasts, made by the National Forecast Commission, rely on more accurate information. The Commission knows all the specific features of Romanian economy. It’s quite normal for different estimates to exist, but I believe that the gap will diminish during the year,” Anca Dragu has explained.

The World Bank has recently announced that it significantly reduced its estimates regarding the development of Romanian economy in the coming two years, when Romania’s GDP is expected to increase by 3.7% and 3.4% respectively, which is 0.4% and 0.6% less than estimated in January. Also, in early May the European Commission announced that Romania’s economic growth would slow down in 2017 to 3.7%. The IMF too has warned that this year’s peak growth will be followed by a slowdown in 2017. Here is economic analyst Aurelian Dochia:

Aurelian Dochia: “This is very good news for the Romanian economy, because the development rate remains high, one of the highest in Europe. We are talking about 4.2% in 2016 and 3.7% in 2017. The European Commission has noted some threats related to the budget deficit, which we know that this year will double, from 1.4% to 2.8%, and will likely exceed 3% next year, around 3.4%. There is disagreement here with the Romanian forecasts, because the Finance Ministry and the Forecast Commission say that the deficit can be kept under 3% even in 2017. Apart from the deficit figures, also relevant are those concerning inflation, first of all because of the drop in the oil price, at international level. The energy price has led to a drop in the inflation index in Europe, including Romania. In the first half of this year, inflation stayed negative, but in the second half it will go up. Obviously, 70% of the evolution of inflation is tied to these developments on the energy market and we’ve seen that volatility has been rather high in international markets in terms of energy product prices. This is where we might see some surprises.”

The European Commission, however, has voiced some reserves as to the recent debt discharge law, drafted for those citizens who can no longer pay the loans they took in order to buy a home. Under this law, which came into force in May, any citizen who took out a mortgage loan of up to 250,000 Euro can choose to give up their home to the bank, in exchange for being discharged of the remaining debt.

Aurelian Dochia: “Indeed, it is one of the risks that Romania might be faced with this year, a risk that could destabilize its financial market to a certain extent. It is not the first time that the European Commission signals this and, besides the debt discharge law, the Commission also mentions the fact that 2016 is an election year for Romania and it quite often happens in an election year that fiscal policy sideslips may occur. We are all aware of this and must see if these risks turn into reality.”

In the first quarter of this year, Romania’s GDP went up by 4.3% as compared to the same period in 2015. And compared to the last quarter of 2015, the growth stood at 1.6%. Valentin Lazea, chief-economist with Romania’s Central Bank, has said that Romania’s economic growth can no longer be based on tax cuts or monetary policy relaxation.

Valentin Lazea: “The classical methods to achieve economic growth, such as fiscal and monetary relaxation, have already been used up. From the man in the street to politicians, we all have to understand that we can no longer rely on fiscal or monetary relaxation. They cannot but get tightened from now on. This resource has been exhausted and we must find other mechanisms to ensure economic growth. And the only real mechanisms for medium and long term growth are related to the factors at the foundation of the GDP: capital, labour force and productivity.”

According to Valentin Lazea, beyond setting the guidelines for achieving growth, we also need to establish who is going to implement that: the state, or the private sector. He believes that we need a change of perspective and that the state and private sector must cooperate; the state must set the development principles, while the private sector must use its expertise to run and complete major projects in various key-sectors.