Romania Country Report May17 - May, 2017

June 6, 2017

Amid bleak forecasts from EC and IMF related to the imminent fiscal slippage (EC projects 3.5%-of-GDP deficit this year, 0.5% of GDP above government’s target), Romania announced in May 2017 robust 5.7% Q1 GDP growth, under flash estimate (not including detailed dynamics by formation sources or utilisation). The good news are, however, insufficient to offset the concerns related to radical reforms planned by the government: primarily the unified public wage bill, scheduled for enforcement before July. The International Monetary Fund (IMF) has estimated that the fiscal policies envisaged by Romania will result in a wide deviation (of over 2% of GDP) from the optimum 1.5% of GDP medium-term budget deficit. The Fund projected 4.2% GDP growth in 2017 amid a 3.5% p.a. medium term trend growth (and 5.3% growth projected by government). Government’s plans for a radical reform of the income taxation turned uncertain after ruling majority’s leader Liviu Dragnea spotted some technical problems and recommended a different approach.
 
Behind the robust GDP growth in Q1 it seems to be the industrial recovery (either sustainable, or circumstantial), also visible in the 7.3% y/y rise of the industrial output. The 430,000 new jobs created in the past three years ending March 2017 despite the repeated hikes of the minimum statutory wage apparently also supports the idea of a vibrant economy. However, out of the 430,000 new jobs, only 90,000 were created in industry and most likely the bulk of them were in retail -- most likely the main driver of the GDP expansion in Q1.
 
The sluggish financial intermediation was spotted by the central bank as an issue related to sustainable economic growth. The real problem seems to stem with the model of the banking system: the deposits/savings (of population but also firms) are increasing, while the real sector tends to finance from other sources: either parent, foreign companies, or trade credit. Under these circumstances, the assets management in banking became atypical. The solvency ratios rose to new maxima and the loan-to-deposit ratio, once pushed down by foreign financial groups, dropped at new minima. On the upside, this situation opens the door for new financial developments: more diversified investment funds in the country, investments abroad.


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