Romania Country Report - August, 2014

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Romania Country Report - August, 2014

This report covers the main Romanian macroeconomic releases of August 2014 [plus half of September] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to July.

Romania will not terminate its stand-by arrangement with the IMF before the March 2015 deadline, PM Victor Ponta stated. Romanian officials and a joint mission of the IMF, WB and EC are discussing in Brussels, starting September 16 until September 19, over the on-going stand-by arrangement [SBA] between the two parties. The discussions occur at a moment when Romania’s budget execution came to a problematic point despite very narrow deficit in January-July.

Romania’s GDP increased by 1.2% y/y in the second quarter of 2014, slowing down from the record 3.9% y/y advance in the first quarter, the statistics office said on Sept 3, confirming its flash estimate released on Aug 14. The second-quarter growth figure has surprised local analysts who expected a milder slowdown.

The gross industrial output index advanced by 5.7% y/y in July, after having lost ground to 8% y/y in Q2 from 10.2% y/y in Q1. While the industrial growth rises at still robust rates, the industrial companies apparently face profitability problems – as revealed by Q2 GDP data. Thus, the value added generated by industry increased by only 2.1% y/y in the second quarter of the year – a major slowdown from the 8% y/y advance seen in Q1.

Romania managed to absorb [actual disbursements] only EUR 36mn in July and EUR 204mn in August, compared to EUR 12bn it has to absorb by the end of 2015. After encouraging performances in the first months of the year, Romania absorbed EUR 1.9bn and it was broadly expected that full-year figure would exceed last year’s EUR 2.8bn.

The non-performing loans (NPL) ratio for the Romanian banking system decreased by 1.1pps m/m to 19.2% at the end of July 2014, the central bank announced. The decrease was by far the steepest since the NPL ratio started being calculated in September 2008. The sudden improvement in the bank assets quality was very likely driven by the sale of bad assets. The process is expected to continue, as the central bank pursues its plan on persuading banks to clean their balance sheets.

Key Points
• IMF, Romanian officials to hold talks over SBA in Brussels
• Fitch confirms sovereign rating, revises downward GDP growth projection
• Romania confirms 1.2% y/y GDP growth for Q2 2014
• Industrial growth eases to 5.7% y/y in July; Exports grow by 6.6% y/y in the month
• Construction works in Romania drop 19.8% y/y in July 2014
• Retail sales growth eases to 6.3% y/y in July from 8% y/y in Q2 2014
• Headline inflation eases to 0.84% y/y in August
• Budget turns to 0.4%/GDP surplus in July after 0.5%/GDP deficit in H1 2014
• Absorption of EU funds remains weak
• Banks to sell major bad loan bundles by end-2014 – sources
• Banks report -0.44% annualised ROA in Q2, remains profitable in H1
• Bank loans keeps shrinking, drop by 3.4% y/y at end-July 2014
• Central to cut interest rate at end-Sept meeting - local analysts


Table of Contents

EXECUTIVE SUMMARY 5
RELATIONSHIP WITH IFIs 6
IMF, Romanian officials to hold talks over SBA in Brussels 6
Romania to smoothly complete stand-by deal with IMF – PM Ponta 6
Fitch confirms sovereign rating, revises downward GDP growth projection 7
POLITICS 7
Romania’s Corina Cretu to be next commissioner for regional policy 7
ELECTORAL UPDATE 8
Government endorses controversial bill on change of political affiliation of elected local officials 8
REAL SECTOR 8
1. Corporate, structural reforms 8
2. GDP, forecasts 9
Romania confirms 1.2% y/y GDP growth for Q2 2014 9
Net investments in Romania down 9.1% y/y in Q2 2014 11
Actual final consumption makes strongest contribution to GDP growth since recession in past three quarters. 11
Weaker investments have offset the rise in final consumption. 11
Industry’s contribution to y/y growth eases after four quarters of robust performance. 12
3. Industry, Constructions, Retail 12
Industrial growth eases to 5.7% y/y in July. 12
Car output down 21% y/y in July 2014 13
Services delivered to Romanian companies up 4.7% y/y in July 2014 13
Use of primary energy resources up 3.9% y/y in Jan-July 14
Construction works in Romania drop 19.8% y/y in July 2014 15
Retail sales growth eases to 6.3% y/y in July from 8% y/y in Q2 2014 16
Services delivered to households, 2.1% down y/y in July 17
4. Prices, Inflation 17
Headline inflation eases to 0.84% y/y in August 17
Industrial price inflation accelerates to 0.5% y/y in July 2014 18
5. Labour Market 19
Wages up real 4.1% y/y in July 19
ILO unemployment down 0.3pps y/y to 7.0% in July 2014 19
FISCAL SECTOR 20
1. Budget Execution 20
Budget turns to 0.4%/GDP surplus in July after 0.5%/GDP deficit in H1 2014 20
2. Fiscal Policy, Public Debt 21
Lawmakers stick with 5pps cut in labour taxation 21
Romania to cut tax on special industrial assets to 1.0% from 1.5% 21
PM Ponta committed to boost public investments in Q3. 22
3. EU Budget 23
Absorption of EU funds remains weak 23
4. Public Debt 23
ESA gross public debt up 7.3% y/y at end-June 2014 but stays at 39.3%/GDP 23
FINANCIAL SECTOR 24
Banks to sell major bad loan bundles by end-2014 – sources 24
Banks report -0.44% annualised ROA in Q2, remains profitable in H1. 25
1. Bank Loan Quality. 25
NPL ratio of banks down 1.1pps in July 2014 25
Overdue payments on Romanian bank loans shrink 10.9% y/y at end-July 2014 27
2. LOANS, DEPOSITS 28
Bank loans keeps shrinking, drop by 3.4% y/y at end-July 2014 28
Deposits in banks up 6.9% y/y at end-July 2014 29
3. MONETARY POLICY 30
Central to cut interest rate at end-Sept meeting - local analysts 30
4. CORPORATE 30
Romania’s insurance market shrinks by 6.8% y/y in H1 30
EXTERNAL SECTOR 31
1. Balance of Payments 31
Jan-July C/A balance turns to deficit but 12-mo gap eases to 1.6%/GDP 31
2. Foreign Trade 32
Exports grow by 6.6% y/y in July 32
3. External Debt 33
Romania’s gross external debt down 2% ytd to EUR 95.5bn at end-July 2014 33
4. Forex Reserves 34
Romanian c-bank forex reserves edge down by EUR 33mn in August 2014 34


Table 1: Industrial production [%, y/y] 13
Table 2: Construction Works Volume Index [%, y/y] 15
Table 3: Retail Sales Volume Index [% y/y] 16
Table 4: Consumer, Producer Prices [%, y/y] 18
Table 5: Wages, employment 20
Table 6: General government budget [RON mn] 21
Table 7: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 25
Table 8: Quality of the stock of bank loans [eop, RON mn unless otherwise indicated] 27
Table 9: Current Account [EUR mn] 32
Table 10: Romania CA balance Jan-Jun 2014 32
Table 11: Foreign trade [EUR mn] 33
Table 12: External debt [EUR mn] 34


Fig. 1: Seasonally adjusted GDP 9
Fig. 2: Drivers of GDP growth, utilisation side [main elements] 11
Fig. 3: Drivers of GDP growth, utilisation side [detailed] 11
Fig. 4: Drivers of GDP growth, formation side 12
Fig. 5: Industrial production [2010=100] 12
Fig. 6: Industrial Production, seasonally & workday adjusted [2010=100] 13
Fig. 7: Industrial Production Volume Index, incl. 12-month average % y/y 13
Fig. 8: Construction Works Index [2010=100] 15
Fig. 9: Construction Works, seasonally & workday adjusted [2010=100] 16
Fig. 10: Construction Works Volume Index, incl. 12-month average % y/y 16
Fig. 11: Retail Sales Index, seas. adj. [2010=100] 17
Fig. 12: Retail Sales Volume Index, [2010=100] 17
Fig. 13: Consumer Price Index [y/y] 17
Fig. 14: PPI vs. CPI [y/y] 18
Fig. 15: Average net wage [2000=100] 19
Fig. 16: Employment vs. unemployment 19
Fig. 17: Net profit vs. provision cost [EUR] 25
Fig. 18: Prudential value adjustments [RAS provisioning cost] [EUR mn, quarterly] 26
Fig. 19: Bad loans [EUR] and NPL ratio 26
Fig. 20: Overdue payments on bank loans 28
Fig. 21: Stock of bank loans [EUR mn] 28
Fig. 22: Non-government deposits 29
Fig. 23: C/A deficit in rolling 12M 31
Fig. 24: Foreign trade balance [EUR mn] 32
Fig. 25: Rolling 12M exports [EUR mn] 33
Fig. 26: FOB exports vs. imports [EUR mn] 33
Fig. 27: Exports [EUR mn] 33

Number of pages: 35
Release Date: Tue, 16 Sep 2014