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Romania Country Report - June, 2015

  • July 2015
  • -
  • Emerging Markets Direct Media Holdings
  • -
  • 24 pages

The report covers info as of July 27.



The Fiscal Code - particularly the tax rate cuts included in its text, is in limbo after President Klaus Iohannis has returned the bill to lawmakers for further considerations, warning on possible unsustainable fiscal slippage. The lawmakers will meet after August 15 [Aug 24-25 most likely] to discuss the issue. Finance minister Teodorovici said that central bank's concerns would be considered. But there are high chances that the debates will remain at a political level.



The tax rate cuts stipulated in the Fiscal Code bill, added to the already enacted wage hikes in the public sector next year and the 1%-of-GDP rise in defence spending in 2017, would push the budget deficit to 4.6% of GDP in 2016 and 5% in 2017, according to calculations by the independent Fiscal Council, unveiled at a debate organised by the central bank on July 22.



Romania's senior ruling Social Democratic Party (PSD) has appointed Liviu Dragnea as president for an interim term. Prime Minister Victor Ponta resigned as party leader earlier this month after allegations regarding money laundering and document forgery. He remains as prime minister.



Key Points

oRuling party loses further ground against opposition - poll

oRomania's programme with EC remains "off-track" according to EC vice-president

oRomania confirms 4.3% growth in first quarter

oIndustrial output falls 0.5% y/y in May

oRetail sales growth slows to 3.1% in May

oConsumer price index falls 1.6% y/y in June, on foodstuff VAT rate cut

oGovernment posts 0.6%-of-GDP surplus in H1

oParliament endorses Fiscal Code, including 19% VAT rate

oPublic debt up only 0.9% y/y at end-Apr; debt to GDP drops 1.4pp to 37.5%

oCentral bank keeps policy rate at 1.75%...

o... but c-bank officials hint Fiscal Code might prompt interest rate hikes

oCredit decrease eases to 0.1% y/y in June, as households' loans soar by 25%

oNew local currency loans extended by Romanian banks in May hit pre-crisis levels

oExports up 3.2% y/y in May

Table Of Contents

Romania Country Report - June, 2015
EXECUTIVE SUMMARY4

Government, central bank argue on fiscal policy5

Government, Fiscal Council argue over tax cuts' sustainability...5

...but the debate should be about tax evasion and resource allocation5

IMF advises Romania on improving tax collection5

Tax rate cuts are only part of the problem5

Central bank takes firm stance on Fiscal Code...5

... while Fiscal Council projects over-4.5%-of-GDP budget surplus in 2016-20186

Benefits of tax rate cuts are short lived and offset by future costs - Fiscal Council6

Finance ministry not particularly concerned about the fiscal slippage6

POLITICS6

Ruling party PSD chooses interim president, schedules congress for November6

PM Ponta charged with corruption, some assets temporarily seized7

Ponta rumoured to be planning another long break8

Ruling party loses further ground against opposition - poll8

RELATIONSHIP WITH IFIs8

Romania's programme with EC remains "off-track" according to EC vice-president8

REAL SECTOR9

1. Corporate, structural reforms9

2. GDP, forecasts10

Romania confirms 4.3% growth in first quarter10

3. Industry, Constructions, Retail11

Industrial output falls 0.5% y/y in May11

Primary energy resources used in Jan-May up 3.1% y/y12

Construction works up 4.7% y/y in May12

Retail sales growth slows to 3.1% in May13

4. Prices, Inflation13

Consumer price index falls 1.6% y/y in June13

Industrial prices drop by 2.4% y/y in May14

5. Labour Market14

Net wages up 7.4% y/y in May14

ILO unemployment rate up 0.3pp y/y to 7.1% in May15

FISCAL SECTOR15

1. Budget Execution15

Government posts 0.6%-of-GDP surplus in H115

2. Fiscal Policy16

Parliament endorses Fiscal Code, including 19% VAT rate16

3. EU Funds17

EC approves Romania's Transport Master Plan with optimistic, pessimistic scenarios17

3. Public Debt17

Public debt up only 0.9% y/y at end-Apr; debt to GDP drops 1.4pp to 37.5%17

FINANCIAL SECTOR19

Central bank keeps policy rate at 1.75%19

1.Bank Loan Quality.19

NPL of Romanian banks down 7pp y/y to 13.3% at end-May20

2. LOANS, DEPOSITS20

Credit decrease eases to 0.1% y/y in June, as households' loans soar by 25%20

New local currency loans extended by Romanian banks in May hit pre-crisis levels20

EXTERNAL SECTOR22

1.Balance of Payments22

C/A deficit narrows by 26.4% y/y in Jan-May22

2. Foreign Trade23

Exports up 3.2% y/y in May23

2.External Debt23

Romania's gross external debt falls at end-May23

4. Forex Reserves24

Central bank foreign exchange reserves down EUR109mn in June24



Table 1: Industrial production [%, y/y]12

Table 2: Construction Works Volume Index [%, y/y]13

Table 3: Industria Production Prices14

Table 4: General government budget [RON mn]16

Table 5: Romania's gross public debt under ESA [monthly, RON, EUR bn, % of GDP +breakdown]18

Table 6: Aggregate indicators for credit institutions [eop, unless otherwise indicated]19

Table 7: Romania CA balance Jan-May 2015 [BPM6]23



Fig. 1: Seasonally adjusted GDP10

Fig. 2: Drivers of GDP growth, utilisation side [main elements]10

Fig. 3: Drivers of GDP growth, utilisation side [detailed]11

Fig. 4: Drivers of GDP growth, formation side11

Fig. 5: Romania's public debt [% of GDP]18

Fig. 6: Banking system's net profits [EUR]19

Fig 7: NPL Ratio20

Fig. 8: Overdue payments on bank loans20

Fig. 9: Bank loans (EUR mn)20

Fig. 10: New loans by currency of denomination22

Fig. 11: New loans, RON-denominated, by debtor22


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