The gross domestic product could fall more than we anticipate (-3%), budget deficit could be larger than 7.3% of GDP and inflation much higher than 7% at year-end.

“The president stated it is necessary to cut VAT from the current 24% and to tax pensions at 16%. Yet, the Prime Minister said taxing pensions would not be enough to compensate a VAT cut from 24% to 19%; other measures would be needed. The Prime Minister also stated that current flooding is worse than those from ‘70s (the worst flooding ever in Romania). Therefore, GDP could fall more than we anticipate (-3%), budget deficit could be larger than 7.3% of GDP and inflation much higher than 7% at year-end”, said Nicolaie Chidesciuc (photo), senior economist of ING Bank.

ING warns that the budget gap will be harder to fill if the political pressures in Romania will persist further, as it would have negative effects over the national currency and over t-bills.

The opposition (PSD and PNL) talks more and more about early elections as soon as September this year or late this year. This scenario should not be ruled out given the fragile majority which supports the government and signs that main opposition parties are not so keen for an alliance to form a majority without elections, given statements from leaders of main opposition parties. Such an outcome would be bad for RON and bonds, and could mean difficult access to funding for MinFin. It might also imply derailment in the IMF/EU deal.

ING predicts an exchange rate of 4.3 lei/euro at year-end and for the end of first quarter in 2011. The exchange rates are expected to increase to 4.35 lei/euro at the end of first half in 2011.