Politically motivated reluctance to address the fiscal slippage will bring Romania’s public deficit to 6.3% of GDP this year while securing a decent 2.7% GDP growth in 2024, according to a quarterly macroeconomic report by UniCredit. However, the Italian bank believes that the fiscal corrective package will dampen the growth to 1.9% in 2025.

Despite rather persistent inflation, UniCredit expects Romania’s monetary authority to cut the policy rate starting May, to 6% at the end of 2024 and 4.5% one year later.

The political scenario envisages a continuity in office for the grand coalition formed by the Social Democrats (PSD) and Liberals (PNL), possibly with the support of the ethnic Hungarian party UDMR if needed.

As regards the structure of the fiscal corrective package, UniCredit outlines three components: a higher “flat” single tax rate (16% compared to 10% currently), progressive income taxation (up to 20%-25%), and a higher VAT rate (2-3 percentage points up compared to 19% currently). The first and the third components are much easier to implement, therefore, the bank’s analysts believe they are more likely to be preferred by the government.

A consistent fiscal package could reduce the budget deficit to around 4.7% of GDP in 2025 if adopted as early as January. If its adoption is postponed until July 2025, the budget deficit will exceed 5.5% of GDP next year.

Separately, UniCredit forecasts headline inflation to remain elevated at around 5.6% at the end of 2024 and 2025. However, it expects the moderation in domestic demand to bring core inflation, excluding tax increases, back into the target range (1.5-3.5% ) until the spring of 2025.

Despite this rather unfavorable inflation outlook (the central bank targets 4.7% and 3.5% yearend inflation in 2024 and 2025, respectively), UniCredit believes that the National Bank of Romania (BNR) could start reducing the monetary policy interest rate in May and bring it to the level of 6% at the end of 2024 and 4.5% one year later.

Even if the government increases the VAT rate next year, UniCredit expects the BNR to continue reducing the key interest rate up to 4.5%, based on the downward dynamics of the inflation calculated without the effect of the tax rate hikes.

iulian@romania-insider.com

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