Romania Country Report - June, 2015

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Romania Country Report - June, 2015

The report covers info as of July 27.

The Fiscal Code – particularly the tax rate cuts included in its text, is in limbo after President Klaus Iohannis has returned the bill to lawmakers for further considerations, warning on possible unsustainable fiscal slippage. The lawmakers will meet after August 15 [Aug 24-25 most likely] to discuss the issue. Finance minister Teodorovici said that central bank’s concerns would be considered. But there are high chances that the debates will remain at a political level.

The tax rate cuts stipulated in the Fiscal Code bill, added to the already enacted wage hikes in the public sector next year and the 1%-of-GDP rise in defence spending in 2017, would push the budget deficit to 4.6% of GDP in 2016 and 5% in 2017, according to calculations by the independent Fiscal Council, unveiled at a debate organised by the central bank on July 22.

Romania’s senior ruling Social Democratic Party (PSD) has appointed Liviu Dragnea as president for an interim term. Prime Minister Victor Ponta resigned as party leader earlier this month after allegations regarding money laundering and document forgery. He remains as prime minister.

Key Points
• Ruling party loses further ground against opposition – poll
• Romania's programme with EC remains “off-track” according to EC vice-president
• Romania confirms 4.3% growth in first quarter
• Industrial output falls 0.5% y/y in May
• Retail sales growth slows to 3.1% in May
• Consumer price index falls 1.6% y/y in June, on foodstuff VAT rate cut
• Government posts 0.6%-of-GDP surplus in H1
• Parliament endorses Fiscal Code, including 19% VAT rate
• Public debt up only 0.9% y/y at end-Apr; debt to GDP drops 1.4pp to 37.5%
• Central bank keeps policy rate at 1.75%...
• … but c-bank officials hint Fiscal Code might prompt interest rate hikes
• Credit decrease eases to 0.1% y/y in June, as households’ loans soar by 25%
• New local currency loans extended by Romanian banks in May hit pre-crisis levels
• Exports up 3.2% y/y in May


Table of Contents

EXECUTIVE SUMMARY 4
Government, central bank argue on fiscal policy 5
Government, Fiscal Council argue over tax cuts’ sustainability… 5
…but the debate should be about tax evasion and resource allocation 5
IMF advises Romania on improving tax collection 5
Tax rate cuts are only part of the problem 5
Central bank takes firm stance on Fiscal Code… 5
… while Fiscal Council projects over-4.5%-of-GDP budget surplus in 2016-2018 6
Benefits of tax rate cuts are short lived and offset by future costs – Fiscal Council 6
Finance ministry not particularly concerned about the fiscal slippage 6
POLITICS 6
Ruling party PSD chooses interim president, schedules congress for November 6
PM Ponta charged with corruption, some assets temporarily seized 7
Ponta rumoured to be planning another long break 8
Ruling party loses further ground against opposition – poll 8
RELATIONSHIP WITH IFIs 8
Romania's programme with EC remains “off-track” according to EC vice-president 8
REAL SECTOR 9
1. Corporate, structural reforms 9
2. GDP, forecasts 10
Romania confirms 4.3% growth in first quarter 10
3. Industry, Constructions, Retail 11
Industrial output falls 0.5% y/y in May 11
Primary energy resources used in Jan-May up 3.1% y/y 12
Construction works up 4.7% y/y in May 12
Retail sales growth slows to 3.1% in May 13
4. Prices, Inflation 13
Consumer price index falls 1.6% y/y in June 13
Industrial prices drop by 2.4% y/y in May 14
5. Labour Market 14
Net wages up 7.4% y/y in May 14
ILO unemployment rate up 0.3pp y/y to 7.1% in May 15
FISCAL SECTOR 15
1. Budget Execution 15
Government posts 0.6%-of-GDP surplus in H1 15
2. Fiscal Policy 16
Parliament endorses Fiscal Code, including 19% VAT rate 16
3. EU Funds 17
EC approves Romania’s Transport Master Plan with optimistic, pessimistic scenarios 17
3. Public Debt 17
Public debt up only 0.9% y/y at end-Apr; debt to GDP drops 1.4pp to 37.5% 17
FINANCIAL SECTOR 19
Central bank keeps policy rate at 1.75% 19
1. Bank Loan Quality. 19
NPL of Romanian banks down 7pp y/y to 13.3% at end-May 20
2. LOANS, DEPOSITS 20
Credit decrease eases to 0.1% y/y in June, as households’ loans soar by 25% 20
New local currency loans extended by Romanian banks in May hit pre-crisis levels 20
EXTERNAL SECTOR 22
1. Balance of Payments 22
C/A deficit narrows by 26.4% y/y in Jan-May 22
2. Foreign Trade 23
Exports up 3.2% y/y in May 23
2. External Debt 23
Romania’s gross external debt falls at end-May 23
4. Forex Reserves 24
Central bank foreign exchange reserves down €109mn in June 24

Table 1: Industrial production [%, y/y] 12
Table 2: Construction Works Volume Index [%, y/y] 13
Table 3: Industria Production Prices 14
Table 4: General government budget [RON mn] 16
Table 5: Romania’s gross public debt under ESA [monthly, RON, EUR bn, % of GDP +breakdown] 18
Table 6: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 19
Table 7: Romania CA balance Jan-May 2015 [BPM6] 23

Fig. 1: Seasonally adjusted GDP 10
Fig. 2: Drivers of GDP growth, utilisation side [main elements] 10
Fig. 3: Drivers of GDP growth, utilisation side [detailed] 11
Fig. 4: Drivers of GDP growth, formation side 11
Fig. 5: Romania’s public debt [% of GDP] 18
Fig. 6: Banking system’s net profits [EUR] 19
Fig 7: NPL Ratio 20
Fig. 8: Overdue payments on bank loans 20
Fig. 9: Bank loans (EUR mn) 20
Fig. 10: New loans by currency of denomination 22
Fig. 11: New loans, RON-denominated, by debtor 22

Number of pages: 24
Release Date: Tue, 28 Jul 2015