The stipulations of the new Fiscal Code risk accelerating consumption in 2016, one of the consequences being the overheating of the economy, Erste bank analysts write in a recent report.
Romanian private consumption could surpass by 1.1 percentage points the previous estimates, being set to reach 4.5 per cent, as an effect of the new Fiscal Code’s package of measures, Erste Bank analysts show in a recent analysis quoted by bzi.ro.
One of the risks generated by its implementation would be the overheating of the economy because of the rise in private consumption. According to Erste estimates, private consumption will grow by 4.6 per cent in 2017, 4.4 per cent in 2018 and 4.2 per cent in 2019. In these conditions, the average growth in consumption will stand at 4.5 per cent during the period analyzed, one percentage point above the estimate included in the financial institution’s main scenario. The Austrian bank’s main scenario entailed a private consumption growth of 3.7 per cent this year, 3.6 per cent in 2016, 3.5 per cent in 2017 and 3.4 per cent in 2018 and 2019.
The possibility that the budget deficit may not be in line with Romania’s commitments included in its agreements with the IMF and the European Commission (a deficit below 3 per cent of GDP), is among the risks mentioned by Erste Group in relation to the new Fiscal Code. This would worsen Romania’s relations with international creditors.
For 2016, Erste revised upward its forecast on the budget deficit, from 1.2 per cent in the main scenario to 3.5 per cent of GDP. In what concerns the next three years, the bank revised its budget deficit forecast from 1.1 per cent to 3 per cent of GDP in 2017, 2.6 per cent in 2018 and 2.3 per cent in 2019. For 2016-2019 the institution forecasts an average deficit of 2.9 per cent of GDP.
Other risks presented by Erste consist of financial rating agencies downgrading Romania’s ratings, the rise in financing costs, the drop in investments as a result of the adjustment of short-term expenditures, as well as medium-term adjustments that would have the opposite economic effects.
In view of the VAT being lowered from 24 to 19 per cent, Erste revised downward its inflation rate forecast for December 2016, to 0.7 per cent, while the average inflation rate will remain slightly negative (-0.3 per cent).
“The lowering of VAT will blur the inflationary pressures in 2016 and we do not rule out that the economy could show signs of overheating,” the Erste analysis reads. There are however other risks too. One of them consists of the Government’s intention to significantly hike public sector salaries in 2016, the measure’s estimated impact being of 1.3 per cent of GDP, and to hike defence spending by 1 per cent of GDP starting in 2017. Moreover, Parliament approved on June 30 the reintroduction of special pensions for servicemen, which will amplify budget pressures.
However, there are positive aspects too, bzi.ro notes quoting Erste’s latest report on the new Fiscal Code. Included among them are the acceleration of economic growth, the growth of private investments, the growth of consumption, of savings and the improvement of credit quality. At the same time, companies will have supplementary funds and the banks will benefit from bigger issuances of government bonds if Romania maintains its investment-grade ratings. For 2015, Erste Group maintained its estimate concerning Romania’s economic growth at 3.2 per cent, but improved its forecast for 2016 from 3.5 to 4.2 per cent. Erste revised upward its estimates for following years too, to 4.4 per cent in 2017, 4.5 per cent in 2018 and 4.6 per cent in 2019.