Romania’s FDI surges by 37% in Q3, strengthening domestic demand

Romania’s FDI surges by 37% in Q3, strengthening domestic demand
By Iulian Ernst in Bucharest November 16, 2017

The volume of net Foreign Direct Investments (FDI) to Romania increased by 37% y/y to €1.65bn in Q3, the central bank announced. The inflows of FDI increased by 40% y/y to €1.66bn.

The rise in FDI was prompted by inter-company (intra-group) lending in Q3, while on a broader perspective FDI is a result of re-invested earnings not repatriated by FDI investors. This indicates that the Current Account (CA) deficit corrected for such effects is in fact smaller than the official CA gap calculated under BPM6, but the "genuine" FDI (money brought by new investors) is also smaller.

The increase in FDI over Q3, 2016 (€450, mainly consisting in intra-company lending) is of a magnitude that could explain 1pp of the stunning 8.8% GDP growth in Q3. This is, however, a one-off effect since such growth in FDI is not likely to remain sustainable in the medium term. The rise in 12-month FDI (€777mn, 20% y/y expansion) is of a magnitude that could explain nearly 0.5pp of the GDP growth while the rise in FDI is not likely to continue at such high rates.

The FDI in the rolling 12-month period ending September amounted to €4.57bn (some 2.7% of GDP), 20% up y/y. This compares to a 29% y/y widening of the CA deficit to €4.80bn in same 12-month period. The CA gap coverage ratio (95% for the 12-month period) remains, however, robust indicating that FDI cover the largest part of the CA deficit. Most of the “FDI inflows” (€4.44bn in the 12-month period) consists in equity contributions of foreign investors including reinvested earnings. There is a large chance that the reinvested earnings account for a significant amount, since FDI investors generated €5.19bn of profits in the country (a mere 2% down y/y).

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