Erste, 16 October 2017: Nominal deficits safe. Structural risks

Improving economic conditions have a rather positive effect on budgets through higher tax intake and lower unemployment benefits in CEE. We have cut our deficit forecasts for this year for CEE from 2.2% of GDP to 1.9% on average vs. our assumptions since the beginning of this year for 2017.

The GDP growth outlook was revised upwards from 3.0% to 4.1% in the same time period. While improving tax collection efficiency also helps budgets, some countries feel tempted to loosen the fiscal grip in this environment, as the 3% of GDP nominal Maastricht criteria can be fulfilled more easily.

Countries where we see a deterioration in the structural balance include in particular Romania and Hungary, and slightly Poland. In Romania, the Social Democratic government is delivering on earlier promises to boost the economy through fiscal spending, while in Hungary, the approaching elections in spring next year could be blamed. The most marked improvement in the structural balance has been seen in Serbia and Croatia in the last few years, and thus, further strong improvement is not expected here. In Slovakia, the structural balance could improve further, albeit to a lesser extent than expected earlier.

Romania: Romania’s structural budget deficit has widened in 2016, according to the EC data, reaching 2.6% of GDP, from only 0.6% in 2015. Current projections of the EC show an additional deterioration of the structural budget deficit to 3.9% of GDP in 2017.

The output gap is estimated by the EC to have closed in 2016 and to become positive in 2017, against the backdrop of the loose fiscal and wage policies followed by the government. Following the EC’s requests to limit the deviation from the MTO, the government seems to have slightly changed its fiscal strategy and announced some measures for keeping the deficit under control.

The excise tax on car fuels was increased in the autumn, future increases in special pensions will be capped and companies should pay higher social insurance contributions for part-time workers. Fresh fiscal consolidation measures are not ruled out and even the NBR discussed this possibility at the most recent MPC meeting, according to the minutes released on the website.

Romania retapped 10Y Eurobonds at MS + 128bp to add EUR 1bn to liquidity buffer, while rejecting all bids at LCY bond auctions; government successfully reshuffled

For more details please see the report below:

Nominal deficits safe, but structural balances could be deteriorating

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