Romania Country Report - February, 2016

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Romania Country Report - February, 2016

EXECUTIVE SUMMARY
The report covers info as of March 11.

The key stories regarding Romania’s macroeconomics at this moment are the sustainability of the high growth rates (3.7% y/y in 2015) and the impact of the datio-in solutum bill – a bill under which banks customers could abandon the mortgage contracts with no further liability in addition to the collateral.

There is little doubt that there was the consumption that pushed up GDP last year.
Consumption has contributed 4pp to the GDP growth in 2015, while gross fix capital formation only 1.8pp. Consumption increased by 5.3% y/y in full 2015 and accelerated to 6.4% y/y in Q4. The investments have increased since 2014, when they decreased by 3.1% y/y, but they remain at a low level both in absolute terms and as a percentage of GDP compared to the pre-crisis peak of 2008.

Key Points

• Romania raises €1.25bn upon re-opening 10-yr, 20-yr Eurobonds
• Public debt to GDP ratio down 1.2pp y/y to 38.6% at end-2015
• GDP up 3.7% y/y in 2015, driven by consumption
• Net investments rise by 8.4% y/y in 2015 from low base
• Industrial growth eases to 2% y/y in Q4; 2.8% y/y in full 2015
• Construction works up 11.7% y/y in Q4; 10.4% up y/y in 2015 on maintenance, repair of roads
• Retail sales 15.6% y/y up in January; accelerates from 8.9%b y/y in 2015
• Headline inflation plunges to minus 2.1% y/y in January on VAT rate cut and further sinks into negative area to minus 2.8% y/y in February, on energy prices
• C-bank governor considers monetary policy tightening
• Wages surge by 11.1% y/y in Q4 and accelerates to 14.1% y/y in January
• Romania’s banks achieve €1.1bn net profits in 2015, on €82bn assets
• Banks' profitability above EU average despite high NPL ratio, c-bank finds
• PwC expects Romanian banks to sell €2.5bn of NPLs in 2016
• Overdue loans to banks ease by 18% y/y to €4.6bn at end-January
• EBA NPL drops to 13.6% at end-2015, 7.1pp down y/y
• Banks extend €843mn new loans in January, 31% up y/y
• BIS-reporting banks cut exposure to Romania by 3.2% of GDP in 4Q ending Sep-15
• FOB trade gap widens 59% y/y to 3.6% of GDP in 2015
• Exports shrink 1.6% by y/y, trade gap keeps widening in January
• Gross external debt down by 2.2% of GDP in 2015, after hike in 2009-2014


Table of Contents

EXECUTIVE SUMMARY 5
FOCUS STORY: Datio in Solutum bill for mortgage loans 6
Senate endorses key mortgage bill 6
RELATIONSHIP WITH IFIs 7
IMF is visiting Romania for Article IV Consultations starting March 2 7
POLITICS 7
Government schedules local elections for June 5 7
President of Romania's small but influential UNPR party resigns amid corruption allegations 8
REAL SECTOR 9
1. Corporate, structural reforms 9
2. GDP, forecasts 9
GDP up 3.7% y/y in 2015, driven by consumption 9
Net investments rise by 8.4% y/y in 2015 from low base 11
3. Industry, Constructions, Retail 13
Gross use of primary energy up 2% y/y to 32.9mn toe in 2015 13
Construction works up 11.7% y/y in Q4; 10.4% up y/y in 2015 on maintenance, repair of roads 14
Retail sales 15.6% y/y up in January; accelerates from 8.9%b y/y in 2015 15
4. Prices, Inflation 16
Headline inflation plunges to minus 2.13% y/y in January… 16
5. Labour Market 18
Wages surge by 11.1% y/y in Q4…. 18
… and accelerates to 14.1% y/y in January 19
Labour costs grow 11.4% y/y in fourth quarter 19
ILO unemployment falls to 6.5% in January 19
FISCAL SECTOR 20
1. Budget Execution 20
General government posts 0.63% of GDP seasonal surplus in January 20
Romania raises €1.25bn upon re-opening 10-yr, 20-yr Eurobonds 21
2. Public Debt 22
Public debt to GDP ratio down 1.2pp y/y to 38.6% at end-2015 22
3. EU budget 23
Romania sees €168mn of EU funds frozen 23
Current EU funds absorption for 2007-2013 stagnates m/m at 63.5% at end-Feb 23
FINANCIAL SECTOR 24
Banks' profitability above EU average despite high NPL ratio, c-bank finds 24
PwC expects Romanian banks to sell €2.5bn of NPLs in 2016 24
MONETARY POLICY 25
C-bank governor considers monetary policy tightening 25
BANK REGULATIONS 25
Senate endorses key mortgage bill 25
Romania’s banks achieve €1.1bn net profits in 2015, on €82bn assets 25
1. Bank Loan Quality 26
Overdue loans to banks ease by 18% y/y to €4.6bn at end-January 26
2. LOANS, DEPOSITS 27
Bank loans 2.8% up y/y in Jan despite 1.1% contraction in Nov-Jan 27
Banks extend €843mn new loans in January, 31% up y/y 27
BIS-reporting banks cut exposure to Romania by 3.2% of GDP in 4Q ending Sep-15 29
3. NON-BANK 30
Romania's insurance market 8.2% up y/y in 2015, close to pre-crisis peak 30
Owners of Romanian insurers Carpatica and Astra face criminal charges 30
Leasing market 21% up y/y to €1.6bn 31
EXTERNAL SECTOR 31
1. Balance of Payments 31
C/A gap widens 2.6 times y/y, to a moderate 1% of GDP in 2015 31
2. Foreign Trade 32
FOB trade gap widens 59% y/y to 3.6% of GDP in 2015 32
Exports decelerate to 2.1% y/y growth in Q4; 4.1% y/y in 2015 33
Exports shrink 1.6% by y/y, trade gap keeps widening in January 33
Government considers increasing the budget for the subsidies given to investors 34
2. External Debt 35
Gross external debt down by 2.2% of GDP in 2015, after hike in 2009-2014 35
3. Forex Reserves 36
Forex reserves down €854mn in February 36


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] 22
Table 7: Romania’s gross public [RON, EUR bn, % of GDP +breakdown] 23
Table 8: Romania CA balance Jan-Dec 2015 [BPM6] 32
Table 9: Foreign Trade 33
Table 10: External debt [EUR mn] 36


Fig. 1: Seasonally adjusted GDP 10
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 11
Fig. 5: Industrial production [2010=100] 13
Fig. 6: Industrial Production, seasonally & workday adjusted [2010=100] 13
Fig. 7 Industrial Production, not adjusted, 12-m average y/y 13
Fig. 8: Construction Works Index [2010=100] 14
Fig. 9: Construction Works, seasonally & workday adjusted [2010=100] 15
Fig. 10: Construction Works, seasonally & workday adjusted [2010=100] 15
Fig. 11: Retail Sales Index, seas. adj. [2010=100] 16
Fig. 12: Retail Sales Index, seas. adj. [2010=100] 16
Fig. 13: Consumer Price Index [y/y] 17
Fig. 14: PPI vs. CPI [y/y] 17
Fig. 15: Industrial production price: domestic vs. external 18
Fig. 16: Average net wage [2000=100] 19
Fig. 17: Employment vs. unemployment 20
Fig. 18: Romania’s public debt [% of GDP] 23
Fig. 19: Banking system’s net profits [EUR] 26
Fig. 20: NPL ratio 27
Fig. 21: Overdue payments on bank loans 27
Fig. 22: Stock of non-gov bank loans [EUR mn] 27
Fig. 23: Non-government deposits 29
Fig. 24: Foreign trade balance [EUR mn] 32
Fig. 25: Rolling 12M exports [EUR mn] 32
Fig. 26: Forex Reserves at BNR 36

Number of pages: 36
Release Date: Sun, 13 Mar 2016