Erste expects Romania to register the highest budget deficit in Central and Eastern Europe, of nearly 7% of GDP if it will not change the fiscal policy as most of the approved bills in the election year (2008) will bear their full costs in 2009.
L. Anghel: Romania’s budget deficit, likely to jump to 5%
The highest deficit among CEE8 countries should be in Romania, where the absence of changes in fiscal policy entails a fiscal deficit of roughly 7% of GDP, as most of the approved bills in the election year (2008) bear their full costs in 2009. However, it is very likely that markets will force the Romanian government to open the budget and make changes alone, rather than with the IMF, which would result in higher political costs.
Erste analysts believe that Romania’s call for IMF help will be bond-supportive, as the program would offer a credit line that would reduce the net issuance of government bonds and trigger more aggressive monetary easing.
“Although the 2009 budget draft in Romania is very ambitious in terms of cutting public spending, postponing some wage hikes and suspending bonuses in the public sector, we see the cap for the budget deficit at around 5% (2% is the government’s target)”, said Lucian Anghel, chief economist at Banca Comerciala Romana.
The Romanian government has thus far only announced a stimulus package, but it remains to be seen if it this is to be included in the final 2009 budget (after it is approved by Parliament). The central bank’s support in financing the budget deficit in 2009 is very important, while Eurobonds should be seen as a second option and only for smaller amounts.
“At the same time, securing additional funding from an international financial institution to fund the budget deficit could have positive effects on the FX rate, as well as on credibility, and improve investor sentiment towards
