Romania Country Report - August, 2015

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Romania Country Report - August, 2015

The report covers info as of August 27.

In the context of the debates on the fiscal and budgetary measures envisaged by the Romanian government for January 2016, Romania's central bank governor Mugur Isarescu argued in an interview with Revista 22 in favour of stimulating the supply and not the demand, as the government seems to be doing. Central bank’s vocal comments against excessive stimulation of consumption eventually convinced political parties to adjust the planned fiscal reforms – but the package of tax cuts remains skewed toward stimulating consumption rather investments.

GDP increased by 3.2% y/y in Q2, decelerating from 4.3% y/y in Q1, the country’s statistics office INS reported in its flash estimate on August 14. Seasonally adjusted GDP inched up by a mere 0.1% q/q in Q2, after the 1.4% q/q advance in Q1. It slightly exceeded the pre-crisis peak level.

Key Points
• Ruling coalition, opposition agrees over Fiscal Code including 4pp cut in VAT rate to 20%
• Central bank argues for stimulating supply, not demand
• Market regulator decides on bankruptcy for Astra insurer
• PM Ponta has no plans to resign before December 2016 elections
• Fitch affirms BBB- sovereign rating for Romania; revises upwards growth forecast
• GDP growth eases to 3.2% y/y in Q2, below expectations
• Romania’s industrial growth eases to 1.5% y/y in Q2
• Primary energy resources used in Romania up 3.2% y/y in H1
• Construction works up 8.6% y/y in Q2; residential segment loses momentum
• Retail sales up substantially by 6.1% y/y in Q2…
• … visibly driven by the 13.9% expansion of food sales after VAT rate cut in June
• Consumer prices down 1.7% y/y in July on lower foodstuff VAT rate
• Real wages up 7.3% y/y in Q2; 11% above pre-crisis level
• Political parties agree over Fiscal Code; endorse 4pp VAT rate cut, defer elimination of other taxes
• Government posts 0.6%-of-GDP surplus in H1…
• … and 0.46%-of-GDP surplus in July; 1.06%-of-GDP surplus in Jan-Jul
• Government raises wages of public healthcare system personnel by 25%
• EC commissioner warns Romania could lose EU funds due to low absorption rate
• BIS-reporting banks cut exposure to Romania by 2.9% of GDP in 12-months ending March
• Romanian banks post €270mn net profit in H1
• Stock of bank loans 0.7% down y/y at end-Jul
• Romania’s exports up 7.0% y/y in Q2


Table of Contents

EXECUTIVE SUMMARY 4
Central bank argues for stimulating supply, not demand 5
POLITICS 5
PM Ponta has no plans to resign before December 2016 elections 5
RELATIONSHIP WITH IFIs 6
Fitch affirms BBB- sovereign rating for Romania; revises upwards growth forecast 6
REAL SECTOR 7
1. Corporate, structural reforms 7
2. GDP, forecasts 8
GDP growth eases to 3.2% y/y in Q2, below expectations 8
Winter crops robust, sunflower and maize at risk on prolonged drought 10
3. Industry, Constructions, Retail 11
Romania’s industrial growth eases to 1.5% y/y in Q2 11
Primary energy resources used in Romania up 3.2% y/y in H1 12
Net electricity exports hit 4.6TWh, or 16.2% of net production, in H1 13
Construction works up 8.6% y/y in Q2; residential segment loses momentum 13
June retail sales up 7.9% y/y 14
Growth in sales of technical goods in Romania ease to 6.4% y/y in Q2 15
4. Prices, Inflation 15
Consumer prices down 1.7% y/y on lower foodstuff VAT rate 15
Industrial prices down 2.3% y/y in Q2, on lower energy and capital goods prices 16
5. Labour Market 17
Real wages up 7.3% y/y in Q2; 11% above pre-crisis level 17
ILO unemployment 0.2pp up y/y, at moderate 7% in June 17
Registered unemployment rate down 0.1pp y/y to 5% at end-Jul 18
FISCAL SECTOR 19
Romanian lawmakers defer talks on tax rate cuts planned under Fiscal Code Error! Bookmark not defined.
1. Budget Execution 19
Government posts 0.6%-of-GDP surplus in H1… 19
… and 0.46%-of-GDP surplus in July; 1.06%-of-GDP surplus in Jan-Jul 20
2. Fiscal Policy 20
Government raises wages of public healthcare system personnel by 25% 20
3. EU Funds 21
EC commissioner warns Romania could lose EU funds due to low absorption rate 21
3. Public Debt 22
FINANCIAL SECTOR 23
BIS-reporting banks cut exposure to Romania by 2.9% of GDP in 12-months ending March 23
Romanian banks post €270mn net profit in H1 – c-bank official 24
1. Bank Loan Quality. 25
2. LOANS, DEPOSITS 26
Stock of bank loans 0.7% down y/y at end-Jul 26
Deposit base of Romanian banks up 7% y/y at end-Jul 27
3. CORPORATE 28
Romania’s largest bank BCR turns profitable in H1; NPL ratio down 6.2pp to 23.1% at end-Jun 28
Market regulator decides on bankruptcy for Astra insurer 28
EXTERNAL SECTOR 29
1. Balance of Payments 29
Romania’s Current Account deficit narrows 67% y/y to €285mn in H1 29
2. Foreign Trade 30
Trade gap widens 6.4% y/y in Q2 as imports outpace exports 30
Romania’s exports up 7.0% y/y in Q2 30
2. External Debt 31
External debt hit new four-year minimum at end-Jun 31
4. Forex Reserves 32
Forex reserves at c-bank down €1bn m/m to €29bn at end-July 32


Table 1: Industrial production [%, y/y] 12
Table 2: Construction Works Volume Index [%, y/y] 14
Table 3: Retail Sales Volume Index [% y/y] 15
Table 4: Consumer, Producer Prices [%, y/y] 17
Table 5: Wages, employment 18
Table 6: General government budget [RON mn] 20
Table 7: Romania’s gross public debt under ESA [monthly, RON, EUR bn, % of GDP +breakdown] 23
Table 8: BIS-reporting banks’ exposure to individual emerging europe countries, inflows/outflows [USD mn, %] 24
Table 9: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 25
Table 10: Romania CA balance Jan-Jun 2015 [BPM6] 29
Table 11: Foreign trade [EUR mn] 30
Table 12: External debt [EUR mn] 31


Fig. 1: Seasonally adjusted GDP 9
Fig. 2: Drivers of GDP growth, utilisation side [main elements] 9
Fig. 3: Drivers of GDP growth, utilisation side [detailed] 10
Fig. 4: Drivers of GDP growth, formation side 10
Fig. 5: Industrial production [2010=100] 11
Fig. 6: Industrial Production, seasonally & workday adjusted [2010=100] 12
Fig. 7 Industrial Production, not adjusted, 12-m average y/y 12
Fig. 8: Construction Works Index [2010=100] 14
Fig. 9: Construction Works, seasonally & workday adjusted [2010=100] 14
Fig. 10: Construction Works Volume Index, incl. 12-month average % y/y 14
Fig. 11: Consumer Price Index [y/y] 16
Fig. 12: PPI vs. CPI [y/y] 16
Fig. 13: Industrial production price: domestic vs. external 17
Fig. 14: Average net wage [2000=100] 18
Fig. 15: Employment vs. unemployment 18
Fig. 16: Romania’s public debt [% of GDP] 22
Fig. 17: Banking system’s net profits [EUR] 25
Fig. 18: NPL ratio 25
Fig. 19: Off-balance sheet loans, loans due over 90 days [RON mn] 25
Fig. 20: Overdue payments on bank loans 26
Fig. 21: Stock of non-gov bank loans [EUR mn] 26
Fig. 22: Non-government deposits 27
Fig. 23: Foreign trade balance [EUR mn] 30
Fig. 24: Rolling 12M exports [EUR mn] 30
Fig. 25: Forex Reserves at BNR 32

Number of pages: 32
Release Date: Thu, 27 Aug 2015