Romania Country Report - May, 2014

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Romania Country Report - May, 2014

This report covers the main Romanian macroeconomic releases of May 2014 [plus half of June] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to April.

Romania’s SBA arrangement with IMF remained in limbo until after November’s presidential elections. It is not clear why, but a good guess would be the 5pps cut in the social security contributions. The government was not able to explain how would it offset the expected drop in revenues and the Fund’s representatives issued a release mentioning “certain issues” remained unsettled. In the meanwhile, the government already endorsed the bill on social security contributions cut. The lawmakers will reportedly endorse the bill in early July. The 5pps will take effect as of October. Independent Fiscal Council says that the cut will probably not hurt dramatically the budget balance this year – but it threatens seriously government’s capacity to meet the 1.4% of GDP 2015 deficit target.

The appointment of a new board of directors at the central bank is the other major story for the period covered. In essence, deputy governor Cristian Popa [49] – with no political orientation and supported in the past by parties with opposed orientations, was replaced by the politically active Liviu Voinea [39] – formerly budget minister. Voinea is followed at the central bank by Gheorghe Gherghina – an expert in accounting, rather known for his expertise in preparing budget projections for the past two decades irrespective of the government’s political orientations. The new board of directors at Romania’s central bank might favour stronger currency rather than low interest rates, bankers reacted to the replacements.

Short-term economic indicators for April indicate as expected certain slowdown largely generated by the fewer workdays. We are not particularly concerned about the industrial slowdown -- while the weak activity in construction is a more relevant pattern that reveals low public investments. Easter was celebrated this year in April -- as opposed to May last year, and this generated effects that cannot be fully filtered out by the seasonal and workday adjustments. However, the industrial expansion eased only gradually -- while more dramatic effects [caused not by the workdays but by budget constrains] were seen in the constructions sector.

Detailed Q1 GDP data, under first preliminary form, were released. Romania’s GDP increased by a real 3.8% y/y to RON 162.7bn (EUR 36.1bn) in the first quarter of 2014 driven by the robust growth in industrial production, according to the first estimate released by the statistics office on June 4. On the utilisation side, consumption expanded by 5.4% y/y, while gross capital formation, on the opposite, contracted by 10.4% y/y [a 7.8% y/y contraction for gross fixed capital formation]. Household consumption expanded by 5.8% y/y.

Key Points
• Romania’s stand-by deal with IMF remains in limbo until after autumn 2014 elections
• Major Romanian opposition parties agree on joint candidate in autumn 2014 presidential vote; fail to come up with a single candidate yet
• Leftist PSD wins 37.6% of votes, half of MEPs in European elections
• World Bank revises up Romania’s GDP forecast to 2.8% in 2014 on rising investments
• Industry, domestic consumption drive Romania’s Q1 GDP up 3.8% y/y
• Budget deficit narrows by 71% y/y to 0.14%/GDP in April 2014
• Romania’s ESA public debt hits 40% of GDP at end-Feb 2014
• Romanian banking system posts record 6.3% annualised ROE in Q1 2014
• Local currency lending gains ground in April 2014
• Romania’s end-May forex reserves at lowest level in four years


Table of Contents

EXECUTIVE SUMMARY 5
RELATIONSHIP WITH IFIs 6
Romania’s stand-by deal with IMF remains in limbo until after autumn 2014 elections 6
IMF says some issues on Romania's stand-by deal remain unsettled 6
Romania to get two EUR 750mn Development Policy Loans from World Bank under 2014-2017 strategy 7
Romania’s strategy for 2014-2020 EU funds spending still unsatisfactory – EC 7
Inflation remains major obstacle for Romania’s euro adoption – EC convergence report 8
POLITICS 9
President Basescu's brother arrested for alleged corruption 9
Major Romanian opposition parties agree on joint candidate in autumn 2014 presidential vote 9
Leftist PSD wins 37.6% of votes, half of MEPs in European elections 10
REAL SECTOR 10
1. Corporate, structural reforms 10
2. GDP, forecasts 12
World Bank revises up Romania’s GDP forecast to 2.8% in 2014 on rising investments 12
Industry, domestic consumption drive Romania’s Q1 GDP up 3.8% y/y 12
Actual final consumption makes strongest contribution to GDP growth since recession. 13
Contribution of net exports to GDP growth narrows in Q1, gross fix capital formation keeps shrinking. 14
Industry makes robust contribution to overall growth for fourth quarter in a row. 14
3. Industry, Constructions, Retail 14
Industrial output growth brakes to 2.6% y/y in April on fewer workdays. 14
Volume of new orders in industry contracts by 6.4% y/y in April 15
Services to Romanian companies up 2.8% y/y in April 2014 15
Gross energy intake up 2.7% y/y in Jan-Apr 2014 15
Construction works down 7% y/y in April on major slowdown in civil engineering 16
Retail sales up 4.5% y/y in April despite lower car fuel sales 17
Services delivered to Romanian households up 7.4% y/y in April 2014 18
4. Prices, Inflation 18
Headline inflation eases to 0.94% y/y in May 2014 18
Industrial inflation returns to positive area in April 2014 19
Special tax on industrial assets in Romania to push power prices by 1-2% 20
5. Labour Market 20
Romania’s wages up by real 3.2% y/y in April 2014 20
ILO unemployment down 0.2pps to 7.1% in April 2014 21
FISCAL SECTOR 21
1. Budget Execution 21
Budget deficit narrows by 71% y/y to 0.14%/GDP in April 2014 21
2. Fiscal Policy, Public Debt 22
Independent fiscal council questions 5pps cut in social contributions 23
3. EU Budget 23
Jan-May EU funds absorption below expectations – minister 23
4. Public Debt 24
Romania’s ESA public debt hits 40% of GDP at end-Feb 2014 24
FINANCIAL SECTOR 25
Romanian banking system posts record 6.3% annualised ROE in Q1 2014 25
1. DELEVERAGING 26
2. Bank Loan Quality. 27
Romanian c-bank explains steps for cleaning banks’ balance sheets 27
NPL ratio up 3.18pps y/y to 22.26% at end-March 2014 28
Overdue payments on bank loans in Romania stagnate at 15.2% of loans at end-April 29
2. LOANS, DEPOSITS 29
Local currency lending gains ground in April 2014 29
Stock of bank deposits in Romania up 7.1% y/y at end-April 2014 30
3. MONETARY POLICY 31
Lawmakers appoint new c-bank board of directors, carrying out major replacements 31
Bankers believe new c-bank board might favour currency appreciation 32
4. CORPORATE 33
Ion Tiriac to sell his 45% in lender UniCredit Tiriac to partner UniCredit 33
Raiffeisen reportedly interested in Millennium BCP Romania - sources 33
EXTERNAL SECTOR 34
1. Balance of Payments 34
Jan-April C/A deficit widens 24% y/y to still moderate EUR 298mn 34
2. Foreign Trade 35
Romania’s exports decelerate to 2.2% y/y in April 2014 on early Easter season 35
FOB trade gap widens by 7% y/y in April 2014 35
3. External Debt 36
End-April gross external debt down 6.5% y/y on IFI package repayment 36
4. Forex Reserves 37
Romania’s end-May forex reserves at lowest level in four years 37


Table 1: WB updated forecast on Romania’s economy 12
Table 2: : Industrial production [%, y/y] 15
Table 3: Construction Works Volume Index [%, y/y] 17
Table 4: Retail Sales Volume Index [% y/y] 18
Table 5: Consumer, Producer Prices [%, y/y] 19
Table 6: Wages, employment 21
Table 7: General government budget [RON mn] 22
Table 8: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 26
Table 9: Quality of the stock of bank loans [eop, RON mn unless otherwise indicated] 28
Table 10: Current Account [EUR mn] 35
Table 11: Romania CA balance Jan-Apr 2014 35
Table 12: Foreign trade [EUR mn] 36
Table 13: External debt [EUR mn] 37


Fig. 1: Seasonally adjusted GDP 12
Fig. 2: Drivers of GDP growth, utilisation side [main elements] 13
Fig. 3: Drivers of GDP growth, utilisation side [detailed] 14
Fig. 4: Drivers of GDP growth, formation side 14
Fig. 5: Industrial production [2010=100] 14
Fig. 6: Industrial Production, seasonally & workday adjusted [2010=100] 15
Fig. 7: Industrial Production Volume Index, incl. 12-month average % y/y 15
Fig. 8: Construction Works Index [2010=100] 16
Fig. 9: Construction Works, seasonally & workday adjusted [2010=100] 17
Fig. 10: Construction Works Volume Index, incl. 12-month average % y/y 17
Fig. 11: Retail Sales Index, seas. adj. [2010=100] 18
Fig. 12: Retail Sales Volume Index, [2010=100] 18
Fig. 13: Consumer Price Index [y/y] 18
Fig. 14: PPI vs. CPI [y/y] 19
Fig. 15: Average net wage [2000=100] 20
Fig. 16: Employment vs. unemployment 21
Fig. 18: Net profit vs. provision cost [EUR] 26
Fig. 19: Prudential value adjustments [RAS provisioning cost] [EUR mn, quarterly] 28
Fig. 20: Bad loans [EUR] and NPL ratio 28
Fig. 21: Overdue payments on bank loans 29
Fig. 22: Stock of bank loans [EUR mn] 29
Fig. 23: Non-government deposits 30
Fig. 24: C/A deficit in rolling 12M 34
Fig. 25: Foreign trade balance [EUR mn] 35
Fig. 26: Rolling 12M exports [EUR mn] 36
Fig. 27: FOB exports vs. imports [EUR mn] 36
Fig. 28: Exports [EUR mn] 36

Number of pages: 37
Release Date: Sun, 22 Jun 2014