Romania’s economy shrank 6.4% YoY in first quarter, according to the data made public by National Institute of Statistics, a contraction well above expectations.

Citi’s Ilker Domec says the sharper-than-expected contraction of GDP would narrow the current account gap, hurt the fiscal performance while NBR may have stronger incentives to cut rates, which would dent the currency exchange rates.

“At first glance, one could argue that while the first implication is likely to be currency positive, the latter two would be currency negative. We believe that unless global risk appetite worsens and the NBR cuts excessively, the above-noted developments—in view of the EUR20 billion IMFEU package—are likely to be leu neutral. In this regard, we also argue that the NBR would refrain from easing aggressively if it becomes apparent that rate cuts are hurting the leu”, Citi says.

Ilker Domec has revised the CA gap forecasts for this year, from 6.5% of GDP to 7.4%, in view of the first-quarter weak performance which is likely to continue throughout the year.

Romania’s payment balance gap contracted by 82.1% in first quarter this year, to 709 million euros on significant compression of trade gap and high current payment balance surplus, as NBR informed.

Furthermore, Citi expects the International Monetary Fund to be more understanding if the deviations from fiscal targets are largely driven by lower revenues associated with a larger-than-projected economic contraction.

Romanian authorities and IMF had agreed on quarterly deficit targets so it doesn’t exceed 24.3 billion lei (5.8 billion euros). For the first quarter, Romania has to keep its gap around 8.3 billion lei (2 bln euros) target range, below 14.5 billion lei in second quarter (3.5 billion euros) and below 18.6 billion lei (4.5 bln euros) in third quarter.