UniCredit Bank, one of the top banks in Romania, expects a significant slowdown of the local economic growth from an estimated 4.4% in 2016 to 3.4% in 2017. Moreover, UniCredid’s analysts believe that the first signs of slowdown may be visible starting this year.

“First of all, the agriculture’s contribution to the GDP growth will be lower (or non-existent) in 2017, after very good harvest in 2016. Secondly, lending in local currency has reached a peak this year and will likely slow down in 2017,” UniCredit economists believe. “Thirdly, the real income growth may also slow down next year, as the salary increases will be lower and the inflation will be higher.”

Thus, the bank’s analysts believe that the worries related to an overheating of the local economy due to higher lending are exaggerated.

Another factor that will bring down economic growth next year is the tightening of the state’s fiscal policy. No matter who wins the parliamentary elections, the new Government will have to tighten the fiscal policy by the end of 2017 to keep the budget deficit under 3% of GDP. Thus, some of the past promises, such as the general VAT rate cut from 20% to 19% and the new wage increases in the public sector, may be postponed.

“Public investments will likely be the most affected by the fiscal tightening. (…) The state’s co-financing of EU funded projects and infrastructure investments may be replaced by other types of expenses, as it happened between 2012 and 2015. Thus, the main fiscal risk is not a higher budgetary deficit, but a slower economic growth.”

UniCredit analysts also expect the annual inflation rate to increase from 0% at the end of 2016 to 1% in the first quarter of 2017, and 2% in the second quarter. However, they don’t see the inflation rate going over 2.5% by the end of next year. If this inflation scenario confirms, Romania’s National Bank may keep the current monetary policy interest rate of 1.75% per year until end-2017 and the EUR/RON exchange rate may fluctuate in the 4.40-4.50 interval.

The bank’s analysts also see a victory of the Social Democratic Party (PSD) in the parliamentary elections as the most likely scenario. Thus, PSD may form the future Government with its main ally, the Liberal Democratic Alliance (ALDE), according to the UniCredit report.

A large majority Government formed by the Social Democratic Party (PSD) and the National Liberal Party (PNL) is only likely if the two parties get similar scores and several smaller parties get into the Parliament. Meanwhile, a Government led by the National Liberal Party (PNL) seems as the least likely scenario at this point.

Romania's central bank sees no risk of economy overheating for now

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editor@romania-insider.com