Romania Country Report - February, 2015

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Romania Country Report - February, 2015

The report covers info as of March 20.

Romania’s GDP increased by 2.9% in 2014, driven by the 4.6% y/y rise in domestic consumption that contributed 3.6pp to the overall performance. GDP will increase by 2.8% in 2015, slightly losing steam from the 2.9% expansion in 2014, but will gradually accelerate to 3% in 2016 and 3.5% in 2018, under the Winter Forecast released by state forecasting body CNP on February 23. Growth will be entirely driven by internal demand, particularly by the private consumption, the forecast says.

The drivers of Romania’s GDP growth have changed visibly in 2014 from 2013. Households’ consumption (private consumption) – and particularly households’ direct consumption, has replaced net exports (external demand) as the main driver, latest quarterly data from the statistics office reveals. The key question is whether the domestic demand – for consumption and investments, will keep supporting the growth in the coming years, as forecasted under the baseline scenarios of the state forecasting body CNP and of the main international partners (EC, IMF).We have investigated the causes that generated the shift in order to answer this question.

Local currency bank lending has strengthened since mid-2014, end-December data revealed, and monetary circumstances supported this trend through January and February. The central bank cut the monetary policy interest rate by 125bp to 2.5% at the end of January and by another 25bp in February.

Key Points
• Fitch affirms BBB-/stable rating for Romania: robust fundamentals but structural weaknesses
• Romania plans IPOs of Hidroelectrica, Constanta port and Bucharest airport this year – PM Ponta
• GDP up 2.9% y/y in 2014 driven by domestic consumption; GDP to grow by 2.8% in 2015; at least 3% p.a. in 2016-2018 – CNP forecast
• Investments up 3% y/y in Q4 after seven-quarter decline
• Romania’s industrial growth eases to 1.2% y/y in January
• Economy uses 11% y/y less electricity in January, exports soars 75% y/y
• Retail sales up 6.3% y/y in January
• Headline inflation remains at 0.4% y/y in February
• Net wages up real 6.6% y/y in January
• Government posts 0.56% of GDP surplus in January on lower expenditures and expects fiscal surplus of over 0.67% of GDP in Q1
• EU funds absorption rate remains disappointing in February
• Government is expected to enact the revised Fiscal Code on March 23.
• Public debt hits 40% of GDP at end-2014
• Banks cut bad loans by [no more than] one quarter in eight months to January
• Bank loans 3.8% down y/y at end-January, consumer loans 3% up m/m
• Romania posts 0.4% of GDP C/A surplus in January


Table of Contents

EXECUTIVE SUMMARY 5
Domestic demand substitutes net exports as main growth driver in 2014. Will this last? 6
Private consumption replaces net exports as main growth driver in 2014. 6
Gros fix capital formation makes positive contribution to growth after eight quarters 6
POLITICS 10
Romania’s Finance Minister to resign after being targeted in corruption scandal 10
RELATIONSHIP WITH IFIs 10
Fitch affirms BBB-/stable rating for Romania: robust fundamentals but structural weaknesses 10
REAL SECTOR 11
1. Corporate, structural reforms 11
2. GDP, forecasts 12
GDP up 2.9% y/y in 2014 driven by domestic consumption 12
GDP to grow by 2.8% in 2015; at least 3% p.a. in 2016-2018 – CNP forecast 15
3. Industry, Constructions, Retail 16
Romania’s industrial growth eases to 1.2% y/y in January 16
The trend of the revised seasonally adjusted industrial output looks pretty different after adjustment indicators were updated after January 17
Primary energy use down 0.4% y/y on lower oil, gas intake 17
Economy uses 11% y/y less electricity in January, exports soars 75% y/y 18
Romania’s construction index up 12.2% up y/y in January 18
Retail sales up 6.3% y/y in January 19
Sales of technical consumer goods up 13.7% y/y in 2014 20
4. Prices, Inflation 20
Headline inflation remains at 0.4% y/y in February 20
Industrial production price index up 2.1% y/y in January 21
5. Labour Market 22
Net wages up real 6.6% y/y in January 22
Romania’s ILO unemployment rate down 0.5pp to 6.5% in January 22
Labour costs up 7.87% y/y in Q4 23
FISCAL SECTOR 24
Age-related spending and exposure to financial sector risks are key fiscal planning issues– IMF 24
1. Budget Execution 24
Government posts 0.56% of GDP surplus in January on lower expenditures… 24
… and expects fiscal surplus of over 0.67% of GDP in Q1 25
2. Fiscal Policy 26
3. EU Funds 26
EU funds absorption rate remains disappointing in February 26
EC freezes €460mn of payments to Romania under human resources development programme 27
3. Public Debt 27
Romania prepares new Eurobond… 27
… and expands external borrowing limit under MTN programme by €3bn to €18bn 28
Public debt hits 40% of GDP at end-2014 28
FINANCIAL SECTOR 29
CHF LOANS PROBLEM 29
Government drafts bill to help CHF loan debtors… 29
… and lawmakers prepare to endorse personal bankruptcy law in April 30
1. Bank Loan Quality. 31
Banks cut bad loans by [no more than] one quarter in eight months to January. 31
2. LOANS, DEPOSITS 33
Bank loans 3.8% down y/y at end-January, consumer loans 3% up m/m 33
Bank deposit base up 7% y/y at end-December 34
3. NON-BANK 35
Insurance market shrinks by 0.34% y/y in 2014 35
Assets of private pension funds up 36.7% y/y to 3.05% of GDP 35
4. CORPORATE 36
Erste Group incurs substantial losses in Romania amid NPL reduction in 2014 36
Antitrust body allows Banca Transilvania to take over Volksbank in Romania 37
State to launch development bank based on EximBank 37
EXTERNAL SECTOR 38
1. Balance of Payments 38
Romania posts 0.4% of GDP C/A surplus in January 38
2. Foreign Trade 39
Exports up 6.4% y/y in January 39
2. External Debt 40
4. Forex Reserves 40
Romania’s foreign exchange reserves 3.7% down y/y to €30.48bn at end-February 41

Number of pages: 41
Release Date: Fri, 20 Mar 2015