Dutch banking and financial group ING said on Friday it has revised downwards its 2020 growth forecast for Romania, Bulgaria, Serbia and Croatia amid the coronavirus outbreak, while keeping unchanged its growth estimates for 2021.
Prior to the revision, ING expected GDP growth to be only a touch more modest in 2020 compared to 2019, projecting it to slow down to 3.6% from 4.1% in Romania, to 3.0% from 3.1% in Bulgaria, and down to 2.2% from 2.9% in Croatia. For Serbia it expected an acceleration to 4.7% in 2020 from 4.2% in 2019.
"However, as the best laid plans of mice and men often go astray, the outbreak of Covid-19 has rapidly changed the picture, leading us to a point where the term 'recession' does not seem inappropriate. That’s not to say we are there yet and – with a bit of luck and policy wisdom – we see a good chance for the four Balkan countries to avoid such a scenario," ING said.
As a result, it slashed its 2020 GDP growth outlook to 1.2% for Croatia, 2.1% for Bulgaria, 3.9% for Serbia and 2.1% for Romania.
In Croatia, ING estimates that the economy is very exposed to an economic slowdown because of the largest share of tourism in the country's GDP (some 20%), the weak industrial sector and the consumption-dependent growth model, considering that 2.1 percentage points of last year's 2.9% GDP growth was contributed by private consumption.
"It's worth noting that our revised 1.2% GDP growth forecast still incorporates quarterly sequential growth in three out of four quarters in 2020, with a stagnation seen in 2Q20," the report reads.
In addition, ING has lowered its inflation forecast for 2020 to 1.0% from 1.6%, and has revised its year-end euro/kuna exchange rate to 7.55 from 7.45, saying the Croatian kuna looks set to be among the worst performers among the Balkan currencies.
In Bulgaria, ING says that even though 2020 was supposed to be the year of entry in the European Exchange Rate Mechanism II (ERM II), the first formal step towards adopting the euro, the prospects of joining ERM II in the forthcoming months now look more distant, even though there is no straightforward link between this topic and the coronavirus outbreak.
It noted that the Bulgarian economy is not so dependent on tourism as the Croatian one, with travel-related revenues contributing some 10% of Bulgaria's GDP.
ING has also lowered its 2020 inflation forecast for Bulgaria to 2.7% from the initial 3.4%.
In Serbia, it commented, the growth structure is optimistic, with investments continuing to be the main driver, while capital inflows support the Serbian dinar, and inflation allows the central bank to lower borrowing costs.
ING expects inflationary pressures to moderate further on falling oil prices and softer demand, saying it sees average annual inflation at 1.8% in 2020, with headline inflation falling below the 1.5% lower bound of the inflation target range in the coming months.
"Strong domestic demand should be able to absorb the external shocks coming from Serbia’s main trading partners – with Italy and Germany each accounting for some 12% of Serbian exports," the report noted.
On the other hand, ING believes that Romania will experience a serious growth slowdown this year, considering its growth structure and in view of the recent pandemic.
"It is already well known that Romania burned through its fiscal buffers during very good economic times, which leaves the economy exposed to a downturn," the report noted.
"Although we can hardly expect any meaningful fiscal consolidation to occur this year (due both to the Covid-19 impact and to the electoral context), there is no room for fiscal expansion either," the analysts said, pointing out to Romania's fiscal deficit of 4.64%/GDP fiscal gap in 2019.
ING is keeping its year-end euro/leu forecast unchanged at 4.85, saying the Romanian central bank would leave the euro/leu exchange rate to shift higher earlier in the year rather than later.