Romania: Budget deficit likely to exceed the 3.0% threshold

The pace of public finances deterioration seems to have precipitated in the second part of the year, as the budget deficit reached levels unseen since 2010. Moreover, the hard data doesn’t necessarily indicate some newly enacted measures behind the deficit boom (eg, pensions with a 15% hike in September), but rather a continuation of the accentuated revenues/expenses dynamics divergence. While revenues are up by 11.6%, the expenditure side looks increasingly difficult to control: +15.3% on the year, driven by the same ballooning wage bill (+20.1%) and social benefits (+11.1%), despite capital expenditures only at 1.4 percentage points of GDP.

The -2.62% budget deficit in September makes the government's full-year target of -2.76% look quite unrealistic. We have been maintaining our forecast for -3.0% of GDP at the year-end for quite a while, based on the government’s strong commitment to this threshold, as exhibited in previous years. This looks less of a case this year, as the current interim government might have less incentive/power to keep the deficit in check, while a new government will not have much time to patch the budget. That said, we are revising our year-end budget deficit forecast to -3.4% of GDP for this year.

What used to save the day in previous years was strong nominal GDP growth, which managed to offset much of the fiscal slippages and tight spending control in the last part of the year. So far, the economy has been holding up relatively well, but signs of fatigue are showing up lately. The industry is already in contractionary mood, with the latest confidence indicators pointing towards a prolonged weak stance. However, the consumer mood remains optimistic, even close to historical highs, which should keep things moving within the economy. The electoral context is likely to maintain the double-digit wage advances intact at least in the public sector, hence not much could go wrong for the consumers in the short term.