Romania Country Report - September, 2014

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Romania Country Report - September, 2014

This report covers the main Romanian macroeconomic releases of September 2014 [plus half of October] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to August.
Short-term macroeconomic indicators released in Sep-Oct, for the month of August, indicate deterioration of the activity in the real sector. Even the banks eased the pace of cleaning their balance sheets – possibly under controversial bills on personal bankruptcy and forex loans conversion – that created volatility on the bad debt market. The real sector indicators point to a weaker third quarter of the year compared to the second one - -hence negative annual performance in Q3. The major domestic economy problem remains however the budget for next year, after the government took steps with negative impact on the fiscal balance and PM Ponta, running for president, promised even more steps in this direction. While the GDP will probably rise by above 2% this year and the budget deficit will meet the 2.2% of GDP target, any forecast for next year is subject to high uncertainty. The EU funds absorption and public investments might soar, on low base, with a positive impact on the growth rate, under an optimistic scenario. But if the executive keeps failing to fight tax evasion, the public investments are likely to remain weak. Similarly, there is no guarantee that the absorption of EU funds will soar – even if there is practically unlimited potential for using such funds next year.

The judiciary unexpectedly started working at full pace and this might provide a solution to the fiscal problem, even if creating short-term volatility [beneficial, in this case] on the political stage. Sentences against top politicians will eventually turn into the real perception, among lower rank public servants, that stealing can lead to jail. Curbing tax evasion would greatly improve tax collection and balance the budget.
Top politicians that were supposed so far to be above any prosecution, such as Ilie Sarbu, are under prosecutors’ investigations and others, such as Miron Mitrea are already in their way to jail. It seems therefore that the sentences against former PM Adrian Nastase, also in the group of politicians supposed to be immune to justice, were not mere accidents. The sentence against Dan Voiculescu earlier this year paved the way to more similar sentences that should in principle change the expectations of politicians in regard to the consequences of corruption deeds.

Key Points
• SBA with IMF might remain in limbo for a while, for various reasons
• Romania’s fundamentals strong enough for rating upgrade – Erste Group
• Nine former Romanian ministers probed in major “Microsoft” corruption case
• PM Ponta leads in poll for presidential elections, outcome increasingly uncertain
• Romania confirms GDP growth of 1.2% y/y in Q2 2014; IMF cuts 2014 GDP growth forecast to 2.4%
• Industrial output flat y/y in August 2014 as utilities, car production decline
• Romania’s exports lose steam to slim 0.9% y/y advance in August
• Construction works down 15.6% y/y in August 2014
• Retail sales growth eases to 3.7% y/y in August 2014
• Industrial prices up 0.5% y/y in Aug 2014, energy costs rise steeper
• Tax collection agency says revenues rise 0.5% above target in Jan-Sept 2014
• Budget deficit narrows 80% y/y to 0.24%/GDP in Jan-Aug 2014
• Government cuts EU-funded projects under second 2014 budget revision
• Central bank deems illegal personal bankruptcy bill endorsed by government
• NPL ratio of local banks drops 2.8pps q/q to 17.7% at end-July 2014
• Bank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans
• C/A gap widens 93% y/y to EUR 945mn in Jan-Aug 2014


Table of Contents

EXECUTIVE SUMMARY 5
RELATIONSHIP WITH IFIs 6
SBA with IMF might remain in limbo for a while, for various reasons 6
Romania needs no follow-up agreement with IMF – PM Ponta 6
ROBUST MACRO FUNDAMENTALS 6
5-year default probability stays at 9.3% at end-Q3 2014 6
Romania’s fundamentals strong enough for rating upgrade – Erste Group 7
POLITICS 7
Nine former Romanian ministers probed in major “Microsoft” corruption case 8
More top Romanian politicians at rule under investigations for massive frauds 8
ELECTORAL UPDATE 9
PM Ponta leads in poll for presidential elections, outcome increasingly uncertain. 9
PM rejects accusations of illegal employment as intelligence officer 9
REAL SECTOR 9
1. Corporate, structural reforms 9
2. GDP, forecasts 10
Romania confirms GDP growth of 1.2% y/y in Q2 2014 10
Largest bank BCR keeps GDP growth estimate at 2.3% for 2014, 3.3% for 2015 10
IMF cuts Romania’s 2014 GDP growth forecast to 2.4% 11
World Bank downgrades Romania’s 2014 growth forecast to 2.7% 12
3. Industry, Constructions, Retail 12
Industrial output flat y/y in August 2014 as utilities, car production decline 12
Turnover of services provided to Romanian companies slows down its growth to 4.1% y/y in Jul-Aug 2014 13
Gross national energy use up 3.4% y/y in Jan-Aug 2014 on 20% more crude oil refined 14
Construction works down 15.6% y/y in August 2014 15
Retail sales growth eases to 3.7% y/y in August 2014 16
Services rendered to households up 1.4% y/y in August 2014 17
4. Prices, Inflation 17
Inflation accelerates to 1.54% y/y in September 2014 against long-term trend. 17
Industrial prices up 0.5% y/y in Aug 2014, energy costs rise steeper 18
5. Labour Market 19
Wages up by real 4% y/y in August 2014 19
ILO unemployment up 0.1pps y/y to 7.1% in August 2014 20
FISCAL SECTOR 20
1. Budget Execution 20
Tax collection agency says revenues rise 0.5% above target in Jan-Sept 2014 20
Budget deficit narrows 80% y/y to 0.24%/GDP in Jan-Aug 2014 20
2. Fiscal Policy, Public Debt 22
CONTROVERSIAL BUDGET RECTIFICATION 22
Government cuts EU-funded projects under second 2014 budget revision 22
Fiscal Council expresses reserves on second 2014 budget revision 23
3. European Funds 23
Current absorption of EU funds rises by only EUR 960mn in Jan-Sep 2014 23
4. Public Debt 24
FINANCIAL SECTOR 25
Central bank deems illegal personal bankruptcy bill endorsed by government 25
1. Bank Loan Quality. 26
Four Romanian banks exposed to CHF loans risk – c-bank 26
NPL ratio of local banks drops 2.8pps q/q to 17.7% at end-July 2014 26
Overdue payments to Romanian banks drop 16% in Jun-Aug 2014. 27
2. LOANS, DEPOSITS 28
Bank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans 28
Growth of bank deposits in Romania stays robust at 5.7% y/y at end-Aug 2014, term deposits lag behind 29
3. MONETARY POLICY 30
Central bank cuts interest rate by 25bps to 3%, lowers required reserves ratio on local currency deposits 30
4. CORPORATE 30
BIS-reporting banks withdraw funds amounting to 7.5% of their exposure to Romania in Q1 2014 30
EXTERNAL SECTOR 32
1. Balance of Payments 32
C/A gap widens 93% y/y to EUR 945mn in Jan-Aug 2014 32
Stock of FDI investments in Romania hits EUR 60bn, or 42.2% of GDP. 33
2. Foreign Trade 34
Romania’s exports lose steam to slim 0.9% y/y advance in August; imports down 3.9% y/y. 34
3. External Debt 35
Long-term external debt down by EUR 1.4bn ytd to EUR 77.4bn at end-Aug 2014 35
4. Forex Reserves 36
Foreign currency reserves up 0.6% m/m to EUR 31bn at end-Sept 2014 36

Table 1: Industrial production [%, y/y] 13
Table 2: Construction Works Volume Index [%, y/y] 16
Table 3: Retail Sales Volume Index [% y/y] 17
Table 4: Consumer, Producer Prices [%, y/y] 19
Table 5: Wages, employment 20
Table 6: General government budget [RON mn] 22
Table 7: Aggregate indicators for credit institutions [eop, unless otherwise indicated] 26
Table 8: Quality of the stock of bank loans [eop, RON mn unless otherwise indicated] 27
Table 9: Current Account [EUR mn, BPM5] 33
Table 10: Romania CA balance Jan-Aug 2014 [BPM6] 33
Table 11: Foreign trade [EUR mn] 35
Table 12: External debt [EUR mn] 36


Fig. 1: Seasonally adjusted GDP 10
Fig. 2: Drivers of GDP growth, utilisation side [main elements] 12
Fig. 3: Drivers of GDP growth, utilisation side [detailed] 12
Fig. 4: Drivers of GDP growth, formation side 12
Fig. 5: Industrial production [2010=100] 12
Fig. 6: Industrial Production, seasonally & workday adjusted [2010=100] 13
Fig. 7: Industrial Production Volume Index, % y/y incl. 12-month average 13
Fig. 8: Construction Works Index [2010=100] 15
Fig. 9: Construction Works, seasonally & workday adjusted [2010=100] 16
Fig. 10: Construction Works Volume Index, incl. 12-month average % y/y 16
Fig. 11: Retail Sales Index, seas. adj. [2010=100] 17
Fig. 12: Retail Sales Volume Index, [2010=100] 17
Fig. 13: Consumer Price Index [y/y] 17
Fig. 14: PPI vs. CPI [y/y] 18
Fig. 15: Average net wage [2000=100] 19
Fig. 16: Employment vs. unemployment 20
Fig. 17: Banking system’s net profits [EUR] 26
Fig. 18: Prudential value adjustments [RAS provisioning cost] [EUR mn, quarterly] 27
Fig. 19: Bad loans [EUR] and NPL ratio 27
Fig. 20: Overdue payments on bank loans 28
Fig. 21: Stock of non-gov bank loans [EUR mn] 28
Fig. 22: Non-government deposits 29
Fig. 23: C/A deficit in rolling 12M 32
Fig. 24: Primary Income outflows [rolling 12M, EUR mn] 32
Fig. 25: Foreign trade balance [EUR mn] 34
Fig. 26: Rolling 12M exports [EUR mn] 35
Fig. 27: FOB exports vs. imports [EUR mn] 35
Fig. 28: Exports [EUR mn] 35

Number of pages: 36
Release Date: Thu, 16 Oct 2014