Romania Country Report - May, 2016

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Romania Country Report - May, 2016

The report covers info as of May 31.

The debt discharge law was promulgated, first debtors have submitted requests already. Banks consider challenhing the bill to Constitutional court – BancPost has already submitted a request in this regard.

Growth forecasts are particularly optimistic. Romania's GDP will accelerate to 4.2% this year from 3.8% last year, driven by surging domestic demand, according to EC’s Spring Forecast. But the commission warned on widening budget deficit. The deficit should further deepen in 2017, to 3.4% of GDP, based on a no policy-change assumption, the EC projected. Romania’s economy is on a cyclical upswing supported by strong domestic demand, but underlying inflation is expected to continue growing and the current account deficit to widen further because of import growth, the International Monetary Fund (IMF) cautioned on May 11 after concluding Article IV Consultations with the country.GDP is expected to rise by 4.2% this year before decelerating to 3.6% y/y in 2017, under the IMF’s scenario.
The fiscal stimulus has significant impact. The retail sales index in Romania increased by 19% y/y in Q1, according to the statistics office.

Mixed figures in the real sector. The industrial production growth decelerated to 0.6% y/y in Q1, from 2.0% y/y in Q4 and 2.8% y/y in full 2015. This was the weakest performance since 2009. The construction volume index increased by 1% y/y in Q1, Romania’s statistics office said on May 13.

The banking system improves profitability, but fails to spur financial intermediation. Romania’s banking system achieved a 1.26% return on assets (ROA) in Q1, versus only 0.91% in Q1 last year and 1.24% in 2015, according to the central bank. Its average assets increased by 2.5% y/y to RON370bn (€82.4bn) in the quarter. Bank loans increased by 3% y/y at end-Apr, but the corporate loans were 1.5% down y/. NPL stagnates. The NPL ratio increased marginally by only 0.01pp q/q in Q1

Key Points
• Local elections are scheduled for June 5
• Fourth minister leaves Romanian technocratic government
• GDP 4.3% up y/y in Q1, flash estimate shows
• Inflation hits minus 3.25% y/y in April; c-bank cuts 2016 yearend inflation forecast by 0.8pp to 0.6% y/y
• General government budget balanced in Jan-Apr from 0.8% of GDP surplus last year
• Public debt up 4.6% y/y to 38.1% of GDP at end-March
• Banking system posts €258mn profits in Q1, 38% up y/y
• Q1 C/A balance deteriorates to 0.9% of GDP deficit from surplus last year
• Foreign trade gap widens 45% y/y to 6-yr peak in Q1


Table of Contents

EXECUTIVE SUMMARY 5
POLITICS 6
Fourth minister leaves Romanian technocratic government 6
Senate speaker Tariceanu probed for perjury 6
Speaker of Chamber of Deputies most likely to be removed on June 7 7
REAL SECTOR 8
1. Corporate, structural reforms 8
2. GDP, forecasts 8
GDP 4.3% up y/y in Q1, flash estimate shows 8
EC keeps 2016 growth outlook, warns on risks stemming from debt discharge bill 9
IMF expects 4.2% growth in Romania this year, but fiscal stimulus to push up inflation and C/A gap 9
EBRD raises 2016 growth outlook to 4% 10
3. Industry, Constructions, Retail 12
Industrial output 0.6% up y/y in Q1 12
Romania reduces use of primary energy resources by 0.3% y/y uses 8.5% more electricity in Q1 13
Households’ services consumption 15.6% up y/y in Q1 14
Construction works only 1% up y/y in Q1 14
Retail sales 19% up y/y in Q1 15
4. Prices, Inflation 16
Inflation hits minus 3.25% y/y in April 16
Industrial price inflation in Romania stagnates at minus 3.3% y/y in March 17
Central bank cuts 2016 yearend inflation forecast by 0.8pp to 0.6% y/y 18
5. Labour Market 19
Net wages up real 15% y/y in first quarter 19
ILO unemployment remains subdued in Romania amid tight labour market 19
Registered unemployment 0.96pp down y/y to 4.71% in March 20
FISCAL SECTOR 21
1. Budget Execution 21
General government budget balanced in Jan-Apr from 0.8% of GDP surplus last year 21
Tax evasion identified in Jan-Apr estimated at €670mn 22
2. Public Debt 23
Public debt up 4.6% y/y to 38.1% of GDP at end-March 23
FINANCIAL SECTOR 24
Banking system posts €258mn profits in Q1, 38% up y/y 24
MONETARY POLICY 25
Romania’s central bank maintains monetary policy rate 25
1. Bank Loan Quality 26
NPLs 6.7pp down y/y at 13.52% at end-March 26
Overdue loans drop to five-year low 27
2. LOANS, DEPOSITS 28
Bank loans 3% up y/y at end-Apr, corporate loans 1.5% down y/y 28
Kruk to buy Eurobank's Romanian NPL portfolio 31
EXTERNAL SECTOR 31
1. Balance of Payments 31
Q1 C/A balance deteriorates to 0.9% of GDP deficit from surplus last year 32
2. Foreign Trade 33
Foreign trade gap widens 45% y/y to 6-yr peak in Q1 33
2. External Debt 35
Gross external debt 4% down y/y to €89bn at end-March 35
3. Forex Reserves 36
Forex reserves of c-bank €1.38bn up y/y to €31.5bn at end-Apr 36

Number of pages: 36
Release Date: Wed, 01 Jun 2016