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Romania Country Report - September, 2014

  • October 2014
  • -
  • Emerging Markets Direct Media Holdings
  • -
  • 36 pages

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

oSBA with IMF might remain in limbo for a while, for various reasons

oRomania's fundamentals strong enough for rating upgrade - Erste Group

oNine former Romanian ministers probed in major "Microsoft" corruption case

oPM Ponta leads in poll for presidential elections, outcome increasingly uncertain

oRomania confirms GDP growth of 1.2% y/y in Q2 2014; IMF cuts 2014 GDP growth forecast to 2.4%

oIndustrial output flat y/y in August 2014 as utilities, car production decline

oRomania's exports lose steam to slim 0.9% y/y advance in August

oConstruction works down 15.6% y/y in August 2014

oRetail sales growth eases to 3.7% y/y in August 2014

oIndustrial prices up 0.5% y/y in Aug 2014, energy costs rise steeper

oTax collection agency says revenues rise 0.5% above target in Jan-Sept 2014

oBudget deficit narrows 80% y/y to 0.24%/GDP in Jan-Aug 2014

oGovernment cuts EU-funded projects under second 2014 budget revision

oCentral bank deems illegal personal bankruptcy bill endorsed by government

oNPL ratio of local banks drops 2.8pps q/q to 17.7% at end-July 2014

oBank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans

oC/A gap widens 93% y/y to EUR 945mn in Jan-Aug 2014

Table Of Contents

Romania Country Report - September, 2014
EXECUTIVE SUMMARY5

RELATIONSHIP WITH IFIs6

SBA with IMF might remain in limbo for a while, for various reasons6

Romania needs no follow-up agreement with IMF - PM Ponta6

ROBUST MACRO FUNDAMENTALS6

5-year default probability stays at 9.3% at end-Q3 20146

Romania's fundamentals strong enough for rating upgrade - Erste Group7

POLITICS7

Nine former Romanian ministers probed in major "Microsoft" corruption case8

More top Romanian politicians at rule under investigations for massive frauds8

ELECTORAL UPDATE9

PM Ponta leads in poll for presidential elections, outcome increasingly uncertain.9

PM rejects accusations of illegal employment as intelligence officer9

REAL SECTOR9

1. Corporate, structural reforms9

2. GDP, forecasts10

Romania confirms GDP growth of 1.2% y/y in Q2 201410

Largest bank BCR keeps GDP growth estimate at 2.3% for 2014, 3.3% for 201510

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, Retail12

Industrial output flat y/y in August 2014 as utilities, car production decline12

Turnover of services provided to Romanian companies slows down its growth to 4.1% y/y in Jul-Aug 201413

Gross national energy use up 3.4% y/y in Jan-Aug 2014 on 20% more crude oil refined14

Construction works down 15.6% y/y in August 201415

Retail sales growth eases to 3.7% y/y in August 201416

Services rendered to households up 1.4% y/y in August 201417

4. Prices, Inflation17

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 steeper18

5. Labour Market19

Wages up by real 4% y/y in August 201419

ILO unemployment up 0.1pps y/y to 7.1% in August 201420

FISCAL SECTOR20

1. Budget Execution20

Tax collection agency says revenues rise 0.5% above target in Jan-Sept 201420

Budget deficit narrows 80% y/y to 0.24%/GDP in Jan-Aug 201420

2. Fiscal Policy, Public Debt22

CONTROVERSIAL BUDGET RECTIFICATION22

Government cuts EU-funded projects under second 2014 budget revision22

Fiscal Council expresses reserves on second 2014 budget revision23

3. European Funds23

Current absorption of EU funds rises by only EUR 960mn in Jan-Sep 201423

4. Public Debt24

FINANCIAL SECTOR25

Central bank deems illegal personal bankruptcy bill endorsed by government25

1.Bank Loan Quality.26

Four Romanian banks exposed to CHF loans risk - c-bank26

NPL ratio of local banks drops 2.8pps q/q to 17.7% at end-July 201426

Overdue payments to Romanian banks drop 16% in Jun-Aug 2014.27

2. LOANS, DEPOSITS28

Bank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans28

Growth of bank deposits in Romania stays robust at 5.7% y/y at end-Aug 2014, term deposits lag behind29

3. MONETARY POLICY30

Central bank cuts interest rate by 25bps to 3%, lowers required reserves ratio on local currency deposits30

4. CORPORATE30

BIS-reporting banks withdraw funds amounting to 7.5% of their exposure to Romania in Q1 201430

EXTERNAL SECTOR32

1. Balance of Payments32

C/A gap widens 93% y/y to EUR 945mn in Jan-Aug 201432

Stock of FDI investments in Romania hits EUR 60bn, or 42.2% of GDP.33

2. Foreign Trade34

Romania's exports lose steam to slim 0.9% y/y advance in August; imports down 3.9% y/y.34

3. External Debt35

Long-term external debt down by EUR 1.4bn ytd to EUR 77.4bn at end-Aug 201435

4. Forex Reserves36

Foreign currency reserves up 0.6% m/m to EUR 31bn at end-Sept 201436



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, employment20

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 GDP10

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 side12

Fig. 5: Industrial production [2010=100]12

Fig. 6: Industrial Production, seasonally and workday adjusted [2010=100]13

Fig. 7: Industrial Production Volume Index, % y/y incl. 12-month average13

Fig. 8: Construction Works Index [2010=100]15

Fig. 9: Construction Works, seasonally and workday adjusted [2010=100]16

Fig. 10: Construction Works Volume Index, incl. 12-month average % y/y16

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. unemployment20

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 ratio27

Fig. 20: Overdue payments on bank loans28

Fig. 21: Stock of non-gov bank loans [EUR mn]28

Fig. 22: Non-government deposits29

Fig. 23: C/A deficit in rolling 12M32

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


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