Romania faces a fight in the coming months to prevent the economy tipping into deflation, the deputy governor of the National Bank of Romania (NBR) has warned Emerging Markets.
Economic growth has been unencumbered by Russia’s deepening recession, growing faster than any other European nation in March, thanks to rising consumption and lower global oil prices.
Liviu Voinea said the next challenge would be to maintain high consumption levels while staving off the challenge of lower prices, after the government makes good on a promise to slash value-added tax (VAT) in June to 9%, down from 24%.
“In the months to come you will see negative inflation rates in Romania, but don’t confuse that with deflation,” he warned. “We don’t and we won’t have deflation. Lower prices are merely an extension of our new fiscal policy. The decision on VAT was also designed to put more money in people’s pockets.”
The deputy central bank chief also tipped inflation to come in at 0.2% this year, boosted by higher energy costs, with the negative impact of VAT on food prices to remain in place for the next four quarters.
Last week, the European Commission said consumer prices across the eurozone would grow by 0.1% this year, and by 1.5% in 2016.
Voinea added that the central bank’s surprise decision last week to cut its main policy rate by 25bp to a record low of 1.75% — the seventh cut in nine months — was also timed to coincide with the decision to slash VAT, and to chime with central bank activity across the region.
“We needed to cut our policy rate as we needed to maintain an interest rate comparable with our peers,” he said. “We wanted to maintain a positive rate, but not one that was too high.”
STRUCTURAL REFORM
Data from Eurostat showed domestic GDP expanded 4.2% year-on-year in March. Earlier government forecasts of 2.8% growth in the full year 2015 were likely to surprise on the upside, Voinea said, adding: “Those forecasts are conservative in my opinion.”
In its latest regional outlook issued on Thursday, the EBRD raised its 2015 forecast for Romanian growth to 3%, from 2.8% in January. The current account deficit is set to remain at less than 1% for the third straight year.
“There is a continuing need for structural reform across the economy, including improving and reforming state-run enterprises,” Voinea said.
“Only through better corporate governance, and by selling shares in state firms, can we ensure long-term macroeconomic growth and financial stability.”
Lower regional interest rates have also helped the country extend average maturities on sovereign debt to more than five years, helping cut the country’s overall debt burden by more than €2.5bn ($2.86bn) a year in both 2013 and 2014.
The Balkan state has also benefited from its lack of dependence on Russian energy and commodities. “We are only marginally exposed to Moscow,” Voinea said. “Less than 5% of our trade is with Russia, and more than 90% of our gas comes from domestic sources.”