Growth is stalling and remains imbalanced
Romania’s economic recovery has stalled. After rebounding between mid-2020 and mid-2021, GDP growth slowed significantly in Q3 and activity was flat in Q4. Unlike other Central European countries that are EU members, Romania has seen a decline in domestic demand. The contribution of foreign trade has become positive again, mainly due to a fall in imports. Weaker GDP growth is mainly due to a slowdown in consumer spending. Wage growth slowed from 8.1% y/y at the end of 2020 to 7.1% at the end of 2021, while inflation surged from 2.1% in December 2020 to 8.2% a year later. The increase in Covid-19 case numbers between January and September last year also affected consumer confidence.
Moreover, slowing growth remains imbalanced, with falling exports and investment partly offset by private-sector consumption and general government spending. Private and, above all public indebtedness have increased. In 2021, loans to households rose much more quickly than nominal wages (11% versus 7%), and the gap between the growth rate in lending to businesses and nominal GDP growth was even larger (21% versus 10%). Fortunately, between 2015 and 2020, gaps were inverted so debt ratios fell significantly.
Now, the public-sector debt ratio is much higher than it was in the mid-2010s. That is largely due to the 2020 recession and the fiscal plan. However, in 2021, the general government budget deficit remained too high to stabilise the debt ratio, despite nominal growth exceeding sovereign bond yields. In addition, not even the economic contraction was able to reduce the current-account deficit, which continued to deteriorate, rising to almost 8% of GDP in H2 2021.
At the end of 2021, therefore, the twin deficits were well above warning thresholds. For the moment, they are covered by surplus domestic savings (the ratio of bank deposits to bank loans was 109% in September 2021 as opposed to 104% at the end of 2019, producing additional resources equal to 2% of GDP between those two dates), as well as by EU funding and FDI flows (3% of GDP each). External liquidity is not a source of concern because the usual metrics (coverage of imports and of short-term debt by foreign exchange reserves) remain satisfactory. However, the general government’s external debt has significantly increased since 2019 – from EUR 39.8 bn in December 2019 to EUR 47.6 bn in September 2021 – in order to fund the budget deficit. It now makes up around 45% of total public-sector debt as opposed to around 40% at end-2019.
The drag on growth will last
The war in Ukraine has not adversely affected Romania’s exchange rate, since the RON has remained practically stable against the euro since mid-February. However, the local currency 10-year sovereign bond yield has risen by 140 bp to 6.8%. That increase is 2.7 times the increase in official interest rates, which reflects both the presence of non-resident investors in the domestic debt market and their more selective approach in times of stress.
