Romania Country Report - March, 2015

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Romania Country Report - March, 2015

The report covers info as of April 17.

The consensus expectations for Romania’s medium-term growth are improving. S&P projects average 3% p.a. growth on medium run. But there remain some concerns – mainly related to the effects of government’s planned major fiscal reforms. Furthermore, the improvement in investors’ sentiment might have been driven to some extent by the anti-corruption actions and expected positive impact. The reasoning is in principle correct, but the judicial reforms still need to consolidate and to yield a chain of predictable in court. Other driver for positive expectations is the rise in domestic consumption and investments – which remain to be confirmed. Absorption of EU funds remains very disappointing.

Furthermore, the banking system is far from a fast recovery mode. Recent data reveal that the build-up of loans in households’ and companies’ portfolios remained in the negative area in Q4 last year despite more optimistic expectations. Also in the banking system, the balance sheet cleaning, which has advanced robustly since May to December last year, has surprisingly reversed in Jan-Feb.

The planned fiscal reforms are a source of uncertainty. The government cut the VAT rate for food to 9% [from standard 24%] effective June 2015 already. More rate cuts are expected in January, when the revised Fiscal Code is scheduled for enforcement. In principle, lower taxes could spur growth and there is room for such cuts provided tax evasion is reduced. The problem is that the tax collection has traditionally been particularly weak. The tax collection agency ANAF took visible steps to cut tax evasion, but actions in critical sectors such as alcohol, petroleum products trading, fruits and vegetables import and generally the imports in Constanta port, have not been visible yet.

Key Points

• Households’ stock of long-term loans [over 1yr maturity] picked up in Q4 – but the net flow of loans [transactions] remained in the negative area
• Cooperation and Verification Mechanism is driving judicial reforms in Romania, Bulgaria – EC official
• Opposition’s plans to oust government lose momentum
• Government reportedly discussed fiscal reforms with IMF in Washington, SBA remains in limbo
• Statistics office revises 2014 GDP growth 0.1pp down to 2.8%
• IMF forecasts Romania’s growth at 2.7% in 2015
• S&P affirms Romania’s rating, projects robust 3% p.a. growth in medium term
• Industrial growth strengthens to 3.2% y/y in February
• Construction works up 14.8% y/y in Jan-Feb from low base
• CPI inflation accelerates to 0.8% y/y in March, VAT rate cut effect expected
• Net wage up real 6% y/y in February; Romania's ILO unemployment down 0.6pp to 6.4% in February
• Government announces 0.33% of GDP budget surplus in Jan-Feb; Government’s 0.2% of GDP surplus in Q1 supports VAT rate cut plans – PM Ponta
• Fiscal Code bill seriously threatens fiscal stability – Fiscal Council
• Romania should reconsider size and timing of planned tax cuts – IMF
• New minister admits Romania might absorb less EU funds than planned this year
• Romania not ready to enter ERM II in January 2016 – c-bank governor Isarescu


Table of Contents

EXECUTIVE SUMMARY 5
Firms, Households Have Not Resumed Borrowing Yet 6
Households’ stock of long-term loans [over 1yr maturity] picked up in Q4 – but the net flow of loans [transactions] remained in the negative area 6
Companies’ stock of long-term loans also increased in Q4 – but again, this was not an effect of net borrowing. 6
Net borrowing remains negative in Romania, in Q4 6
POLITICS 8
Cooperation and Verification Mechanism is driving judicial reforms in Romania, Bulgaria – EC official 8
Opposition’s plans to oust government lose momentum 8
RELATIONSHIP WITH IFIs 9
IMF concludes Article IV consultations with Romania 9
Government reportedly discussed fiscal reforms with IMF in Washington, SBA remains in limbo 9
EC concerned about Romania’s new Fiscal Code – EC vice president Dombrovskis 10
REAL SECTOR 11
1. Corporate, structural reforms 11
2. GDP, forecasts 12
Statistics office revises 2014 GDP growth 0.1pp down to 2.8% 12
IMF forecasts Romania’s growth at 2.7% in 2015 14
S&P affirms Romania’s rating, projects robust 3% p.a. growth in medium term 15
3. Industry, Constructions, Retail 16
Industrial growth strengthens to 3.2% y/y in February 16
Electricity consumption down 4.1% y/y in Jan-Feb 17
Construction works up 14.8% y/y in Jan-Feb from low base 17
Construction market hits lowest post-crisis level in 2014 – Romanian construction association 18
4. Prices, Inflation 19
CPI inflation accelerates to 0.8% y/y in March, VAT rate cut effect expected 19
Industrial prices down 1.7% y/y in February. 20
5. Labour Market 21
Net wage up real 6% y/y in February 21
Romania's ILO unemployment down 0.6pp to 6.4% in February 21
FISCAL SECTOR 22
1. Budget Execution 22
Government announces 0.33% of GDP budget surplus in Jan-Feb 22
2. Fiscal Policy 23
Government’s 0.2% of GDP surplus in Q1 supports VAT rate cut plans – PM Ponta 23
Romania to cut VAT on food to 9% from June 24
Fiscal Code bill seriously threatens fiscal stability – Fiscal Council 24
Former finance minister defends new Fiscal Code 25
Romania should reconsider size and timing of planned tax cuts – IMF 26
New minister admits Romania might absorb less EU funds than planned this year 27
3. EU Funds 27
3. Public Debt 28
FINANCIAL SECTOR 28
Central bank cuts policy rate by 25bp to 2% 28
Romania not ready to enter ERM II in January 2016 – c-bank governor Isarescu 29
1. Bank Loan Quality. 30
Balance sheet cleaning reverses in January-February 31
Overdue loans down 25% y/y to €5.7bn in Romania at end-Feb 31
2. LOANS, DEPOSITS 32
Gross bank loans down 3.7% y/y as of end-Feb as bad loans are written off 32
Bank deposits up 5.7% y/y at end-Feb 33
3. CORPORATE 34
Banca Transilvania acquires Volksbank Romania 34
Largest bank BCR to sell €1bn-1.4bn NPL bundle 35
Court accepts payment in instalments from troubled Romanian insurer Astra 35
EXTERNAL SECTOR 36
1. Balance of Payments 36
Romania posts 0.2% of GDP C/A surplus in January-February 36
2. Foreign Trade 37
Export growth decelerates to 1.2% y/y in February 37
2. External Debt 38
Romania’s gross long-term external debt down 1.5% ytd to €74.6bn at end-Feb 38
4. Forex Reserves 39
Romania’s forex reserves up €117mn in March on EU funds 39


Table 1: GDP in Q4 and 2014, countribution of sectors and dynamics per sector 12
Table 2: Industrial production [%, y/y] 17
Table 3: Construction Works Volume Index [%, y/y] 18
Table 4: Retail Sales Volume Index [% y/y] 19
Table 5: Consumer, Producer Prices [%, y/y] 20
Table 6: Wages, employment 22
Table 7: General government budget [RON mn] 23
Table 8: Romania’s gross public debt under ESA [monthly, RON, EUR bn, % of GDP +breakdown] 28
Table 9: BIS-reporting banks’ exposure to individual emerging europe countries, inflows/outflows [USD mn, %] 30
Table 10: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 30
Table 11: Romania CA balance Jan-Dec 2014 [BPM6] 36
Table 12: Foreign trade [EUR mn] 37
Table 13: External debt [EUR mn] 38


Figure 1: Stock, flows and other elements of the households’ financial accounts – long-term loans [liabilities] [RON mn] 6
Figure 2: Stock, flows and other elements of the non-financial corporations’ financial accounts – long-term loans [liabilities] [RON mn] 6
Fig. 3: Seasonally adjusted GDP 12
Fig. 4: Drivers of GDP growth, utilisation side [main elements] 13
Fig. 5: Drivers of GDP growth, utilisation side [detailed] 13
Fig. 6: Drivers of GDP growth, formation side 14
Fig. 7: Industrial production [2010=100] 16
Fig. 8: Industrial Production, seasonally & workday adjusted [2010=100] 17
Fig. 9 Industrial Production, not adjusted, 12-m average y/y 17
Fig. 10: Construction Works Index [2010=100] 17
Fig. 11: Construction Works, seasonally & workday adjusted [2010=100] 18
Fig. 12: Construction Works Volume Index, incl. 12-month average % y/y 18
Fig. 15: Consumer Price Index [y/y] 19
Fig. 16: PPI vs. CPI [y/y] 20
Fig. 17: Industrial production price: domestic vs. external 21
Fig. 18: Average net wage [2000=100] 21
Fig. 19: Employment vs. unemployment 22
Fig. 20: Romania’s public debt [% of GDP] 28
Fig. 21: Banking system’s net profits [EUR] 30
Fig. 22: NPL ratio 31
Fig. 23: Off-balance sheet loans, loans due over 90 days [RON mn] 31
Fig. 24: Overdue payments on bank loans 32
Fig. 25: Stock of non-gov bank loans [EUR mn] 32
Fig. 26: Non-government deposits 33
Fig. 27: Foreign trade balance [EUR mn] 38
Fig. 28: Rolling 12M exports [EUR mn] 38
Fig. 29: Forex Reserves at BNR 39

Number of pages: 39
Release Date: Tue, 21 Apr 2015