Industrial production contracted by 2.0% in 2022 and 4.6% year-todate. As of March 2023, it remains almost 6.0% below its prepandemic levels (ie, January 2020). Among the few brighter spots are the food, automotive and pharma sectors which have continued their upward trend and are above both the pre-pandemic period and the similar period from 2022. On the downside, the textile and chemical industries are both some 35% below their pre-pandemic levels, followed by the metallurgical industry at 30% below. The latest confidence data does not look particularly encouraging as production expectations and capacity utilisation collapsed in May 2023 to a two-year low. The number of employees remained fairly constant, though significant shifts occurred within subsectors.
The 4.4% of GDP budget deficit target for 2023 was shaping up to be quite challenging and it definitely is. As of April 2023, the budget deficit reached 1.72% of GDP and already prompted the government to come up with a mild (read: insufficient) spending optimisation plan, amounting at best to some 0.3% of GDP.
Given the social demands for higher wages (at the time of writing there is an ongoing major strike in the public education sector) and the lower GDP growth (leading to lower budget revenues), a more substantial adjustment is likely to be needed at the usual mid-year budget revision. The good news is that sticking to the 4.4% of GDP target for 2023 seems to be a priority.
The bad news is that it might involve cutting public investments which were just catching up some speed.
The current account deficit (CAD) surpassed the worst fears in 2022 as it reached 9.4% of GDP, from 7.3% in 2021. We estimate that at least 1ppt of the 2022 deterioration came from worsening terms of trade, which should be largely reversed in 2023. As mentioned many times already, we remain particularly worried about the stickiness of the CAD and blaming it on the fiscal deficit only holds so much. More positively, the financing structure of the CAD looks relatively sound.
We estimate that over the next 3-4 years, between 70% and 80% of the deficit can be covered via non-debt-creating inflows such as FDIs and EU funds. As a consequence, we estimate that a CAD of 4.0-5.0% of GDP could be considered a ‘natural’ level for an emerging economy like Romania. But we’re not there yet…
After remaining consistently at the lower end of inflation forecasts, it seems things are finally turning our way: inflation looks set to touch 7.0% by the end of 2023, driven by base effects, lower energy prices and an easing of food prices.
We reduce our 2024 year-end estimate to 4.0% from 4.3% previously, while maintaining the view that inflation will not reach NBR’s 1.5-3.5% target range over the next two years.
These developments alone (especially those from 2024) would allow the NBR to cut the key rate quite significantly and still maintain a positive real rate. However, we believe that the NBR will want to consolidate the lower inflation prints and will maintain a relevant positive differential between the key rate and inflation, at least until we see inflation within NBR’s target range.
