Romania Country Report - August, 2016

September 1, 2016

Romania’s economy is growing at a high rate fuelled by fiscal stimulus. GDP advanced by 6% y/y in Q2, but the full-year expansion is expected not much above 4% -- still significantly above the potential growth rate, the central bank warns. Both investors’ and consumers’ confidence seems robust. But the twin deficit expected for this year will perpetuate next year unless adequate corrective policies are pursued.

The parliamentary elections scheduled for December 11 pose a question mark on the timing of the required corrective measures. The Social Democratic party PSD is more likely to form the majority after the yearend. This scenario has a neutral impact on the macroeconomic outlook. The risk of political crisis after elections, caused by prolonged negotiations for the formation of the majority, is moderate but not negligible as well.

In H1, the budget deficit was only 0.5% of GDP. But this rather indicates accumulation of public spending toward the end of the year and consequent pressures on the Current Account deficit that is already widening. A budget deficit of some 2.5% of GDP in H2 would significantly push up domestic demand with visible impact on the C/A deficit that already hit 2.3% of GDP in the past four quarters ending June.
On the upside, country’s external and public debts are at moderate levels of 55% of GDP and 38% of GDP respectively. But further increase, driven by effects of the fiscal stimulus, will bring them to levels that make the country more vulnerable to external shocks.

The banking system has reported robust profitability in Q2, partly because one-off sale of shares in Visa Europe as part of a global deal. The NPL ratio, at 11.3% at the end of June, remains in the double digit area though.

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