This report covers the market developments and statistics data released up to mid-September 2014 – including short-term series as of Q2, 2014 and partly July 2014.Region-level aggregated data from BIS is available as of Q1 [released on September 15 by BIS].

Banks are eventually cleaning their balance sheets, five years after the recession revealed that one fifth of their stock of loans was in fact non-performing. The lending has not recovered, at least not at robust rates. Central bank has cut twice, during the period covered in this report, the monetary policy interest rate by a total of 50bps to 3%. And it lowered by 2pps the required reserves ratio for local currency liabilities to 10%, visibly in an attempt to see the lending engine running again.

But the government holds the brake pedal down – it cut by one quarter the full year public investments from EU funds, under the second budget revision on September 30 [ironically the same day c.bank cut the rate fior the second time]. It was actually not a choice, but the result of public administration’s weak absorption capacity. To address this issue, the government offered local elected officials a temporary loophole in the legislation, inviting them to join the ruling coalition and better spend public funds. This might be harmful to the rule of law, particularly in case ruling coalition’s candidate wins the November presidential elections – but PM Ponta helps this would improve public administration functioning, the absorption of EU funds and the economy in general. Which might debatably be good on short run – but extremely costly on medium run.

Western BIS-reporting banks have withdrawn during Q1, 2014 more than USD 2bn [EUR 1.5bn] from their exposure to Romanian banking system – which remained at USD 25.5bn [EUR 18.5bn] at the end of March, calculations based on data from the Bank of International Settlement revealed. Outflows amounted to 7.5% of initial exposure as of end-2013 and marks visible acceleration of deleveraging. Since end-2008, the average rate of outflows was 9.3% p.a. against 27.3% p.a. in Q1, 2014.

Key points:

• GDP growth decelerates to 1.2% y/y in Q2, full-year outlook shifts from above 3% toward 2%
• Romania to smoothly complete stand-by deal with IMF – PM Ponta
• Central bank cuts required reserve ratio for forex liabilities by 2pps to 16% in end-June, cuts policy interest rate by 25bps to 3.25% in early August and once again in late September
• BIS-reporting banks withdraw, in Q1, funds amounting to 7.5% of their exposure to Romania; 12% in past year, 40% since end-2008
• Lawmakers close to endorse controversial bill on forex loans conversion; which might not happen
• Banks report -0.44% annualised ROA in Q2, remains profitable in H1; the system is likely to deepen in loss by the end of the year.
• Bank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans; NPL ratio of banks drops 2.8pps in three months to 17.7% at end-Jul