UniCredit downgraded its 2024 growth forecast for Romania to 1.7% (from 2.4% in July) due to the poor performance in H1 and a slower-than-anticipated recovery in the EU, but it upgraded its 2025 outlook to 1.9% (from 1.3% in July) owing to base effects, according to the latest research report of the financial group. 

The fiscal uncertainty will shape the economic outlook, the bank's analysts say, adding that tax rate hikes are expected – possibly including a 2pp VAT rate hike as of July 2025. On the external balance side, UniCredit remains more optimistic but still sees the local currency depreciating slightly, towards RON to EUR traded in the 5.0-5.1 band.

The group's analysts expect the private sector will have less funding next year, leading to a slowdown in consumption, while investment is likely to continue to support growth, and exports could start to recover. 

On the supply side, UniCredit expects better construction, real estate transactions, and industry performance.

The National Bank of Romania (BNR) will cut the key rate (currently at 6.5%) to 5% by the end of 2025 and will thus miss the inflation targets under the scenario envisaged by UniCredit. Headline inflation would, therefore, reach 5.0% y/y at the end of 2024 and 4.4% y/y one year later.

"We expect BNR to stay on hold in 2024 at 6.5% due to fiscal uncertainty. We believe that BNR will resume key-rate cuts in February 2025 and will take the key rate down to 5% at the end of 2025, with risks skewed towards faster cuts if the economic activity eases significantly," the report reads.

The bank estimates a deficit of 7.4% of GDP for Romania this year and a downward adjustment to 6% of GDP next year. The public indebtedness measured by the public debt to GDP ratio will thus rise from 48.8% at the end of 2023 to 51.8% at the end of 2024 and 53.2% at the end of 2025, according to the bank's projections.

"The budget deficit remains very high, and although we expect an improvement in 2025, according to our calculations, a deficit around 6% of GDP is the best that can be hoped for," the bank said.

UniCredit believes that "an increase in taxes is inevitable in 2025", the most likely being excise duties, taxes on goods, and higher tax rates for most micro-enterprises. 

The bank is also considering a potential two percentage point increase in the main VAT rate for goods and services, but only from the second half of next year.

UniCredit remains on the optimistic side when it comes to the current account deficit, seen at only 7% of GDP this year and 6% in 2025 and "fully covered by FDI, EU transfers and government borrowing from abroad."

The bank sees no significant depreciation pressure on the RON and expects FX reserves to rise further. However, it expects EUR-RON to move to the 5.00-5.10 trading range in the first quarter of 2025, "followed by a gradual uptrend until the end of the year."

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iulian@romania-insider.com