Foreign direct investment (FDI) to Romania turned negative in the first quarter of the year, particularly in February-March, as multinationals halted their equity investments and asked their local subsidiaries to pay back their loans, according to the balance of payment data published by the central bank.

On the upside, the current account (CA) deficit, despite a significant 22% y/y increase, shows signs of stabilisation from a broader perspective and it is expected to narrow in the coming years. The rolling 12-month CA gap has remained at around €10bn-10.5bn (under 5% of GDP) since last May.  

Romania's central bank announced that the flow of direct investment to Romania recorded a negative net value of €551mn in the first quarter of 2020, compared to net inflows of €1.23bn. The 12-month rolling inflow of FDI plunged from €6bn last summer to €3.5bn as of the end of March this year. This is the weakest annual flow of FDI since 2016. The plunge was mostly driven by local FDI companies returning their loans to parent groups.

Equity investments made by foreign companies in Romania (including reinvested profits) recorded a small, yet positive net value of €248mn (inflows) compared to €874mn in the same period last year.

Meanwhile, inter-company lending recorded a negative net value (outflows) of €799mn in Q1 this year compared to €360mn inflows in the same period last year.

Outflows of over €1bn in February-March generated by the decrease in the credit extended by foreign parent groups to local subsidiaries.

Separately, Romania's current account deficit widened by 22% in Q1 compared to the same period last year, to €1.37bn.

The gap is seasonally small in the first quarter of the year, and the current account deficit is no longer among the main macroeconomic threats. Economists are more concerned about sudden flows that might create liquidity, public financing, and exchange rate tensions.

"We expect the adjustment of the current account deficit to an average level of 2.3% of GDP in the period 2020-2022 [from nearly 5% of GDP in recent years]," commented Andrei Radulescu, chief economist of Banca Transilvania.

Romania's external debt decreased by €4.4bn in March compared to February, to €106.2bn at the end of the month. This was an effect of the foreign groups withdrawing their financing, but mostly of the market value of Romania’s public debt decreasing with the price of its bonds. Over the January-March period, the revaluations due to price changes of the securities issued by the general government, amounted to around negative €2.4bn.