Emerging

Vibrant growth

rd  
Eco Emerging // 3 quarter 2021  
economic-research.bnpparibas.com  
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ROMANIA  
VIBRANT GROWTH  
The Romanian economy is in the midst of a spectacular rebound. Real GDP has already returned to pre-Covid levels,  
and growth should reach 8.2% in 2021. But this performance has been accompanied by high fiscal and external  
deficits. Consequently, contrary to the other Central European countries, public debt is unlikely to narrow by 2022.  
Private-sector borrowers benefited from a moratorium on debt payments, but debt formerly under moratorium now  
presents a non-performing loan ratio of 10.9%. Nonetheless, the banking system should be able to absorb these  
losses. However, one factor worth monitoring is the rapid growth in housing loans.  
GDP HAS ALREADY RETURNED TO PRE-COVID LEVELS  
FORECASTS  
In Q1 2021, Romanian GDP returned to pre-pandemic levels, the first  
of the Central European countries to do so. Household consumption is  
the main growth engine: in April 2021, retail sales were 3.4% higher  
than pre-Covid levels.  
2019  
2020  
2021e  
2022e  
Real GDP growth (%)  
4.1  
-3.6  
2.6  
8.2  
4.7  
Inflation (CPI, year end, %)  
Gen. Gov. balance / GDP (%)  
Gen. Gov. debt / GDP (%)  
3.8  
3.5  
3.5  
Exports are also contributing increasingly to this dynamic momentum.  
In March-April 2021, exports were already 10% higher than the 2019  
level, and they were the main driver of the keyincreasein manufacturing  
production in April, up 6.2% for the month.  
Romania should continue to benefit from vibrant economic growth,  
thanks especially to the easing of health restrictions following two  
waves of the pandemic in Q4 2020 and Q1 2021, and to a buoyant  
international environment.  
Inflation rose to a rapid 3.7% in May 2021, back to the pre-Covid  
level. The main cause of inflation is a base effect: the prices on some  
goods declined during the pandemic and are gradually returning to  
pre-crisis levels. This is notably the case with oil prices. The central  
bank has already communicated about a future monetary tightening,  
but with inflation slightly lower than in its neighbouring countries and  
an unemployment rate that is still higher than pre-crisis levels (5.7%  
in April 2021, vs 3.8% in early 2020), it can still bide its time a bit. Yet  
inflationary pressures should begin rising again by year-end 2021.  
Romania’s economic growth goes with imbalances. The country’s twin  
deficits – fiscal and external – have both widened since 2017. The  
pandemic worsened the fiscal deficit while the current account deficit  
levelled off with the decline in imports. As economic growth returns  
to normal (and oil prices rise), the current account deficit is likely to  
widen again, to a projected 6.5% of GDP in 2021.  
-4.3  
35.3  
-4.6  
49.2  
37.5  
4.5  
-9.2  
47.3  
-5.2  
57.7  
42.5  
5.6  
-6.5  
49.0  
-6.5  
55.3  
43.5  
4.9  
-4.5  
50.0  
-6.7  
53.3  
42.5  
4.4  
Current account balance / GDP (%)  
External debt / GDP (%)  
Forex reserves (USD bn)  
Forex reserves, in months of imports  
e: ESTIMATES & FORECASTS  
TABLE 1  
SOURCE: BNP PARIBAS GROUP ECONOMIC RESEARCH  
MANUFACTURING PRODUCTION  
1
00=2015  
140  
120  
100  
80  
60  
40  
20  
-
LESS FISCAL LEEWAY  
05  
06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21  
SOURCE: CEIC  
The public deficit swelled before the Covid-19 crisis and the European  
authorities were about to launch an excessive deficit procedure. After  
a series of pension increases (+14% in September 2020 after +15% in  
CHART 1  
2
019), the public deficit risks holding above the threshold of 3% of GDP,  
Numerous support measures introduced in 2020 were renewed in 2021,  
including deferred tax payments. State-backed loans also amounted to  
% of GDP, and essentially cover loans maturing between 2023 and  
025.  
The interest charge is also expected to rise (4.8% of fiscal revenue;  
.1% of GDP in 2019). In addition to a rising debt, the government must  
deal with the structurally higher cost of debt as well. Ten-year yields  
on RON government bonds rose to 3.4% at 1 July 2021, 60 basis points  
even after all the long-term fiscal consequences of Covid have been  
absorbed. Yet the 3% rule for the fiscal deficit was suspended after the  
pandemic broke out, and is unlikely to be reinstated for several years  
to come.  
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In January 2021, the constitutional court allowed the government  
to cancel an additional 40% increase in retirement pensions, which  
should help limit the deterioration of the fiscal deficit.  
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Even so, public debt is expected to continue swelling through the end higher than in February. Moreover, they could rise even higher due to  
of 2022, even though nominal GDP growth is strong. Fiscal consolida- expectations of monetary tightening in response to accelerating in-  
tion is likely to be slower than for the other countries of Central Europe. flation. The interest charge should rise to 2% of GDP by 2025. Higher  
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financing costs in the local currency have encouraged the government  
to use the Eurobond market, which increases the share of public debt  
in foreign currencies (nearly 50%).  
SOVEREIGN BOND RATE 10-YEAR (%)  
There is also a risk of fiscal slippage. The coalition government formed  
after the December 2020 elections confirmed the domination of the  
National Liberal Party (PNL), with Florin Citu as Prime Minister. Fiscal  
consolidation is still a future goal. Yet the previous government, which  
was also dominated by the PNL, failed to prevent Parliament from ap-  
proving a substantial increase in pensions (the 40% increase mentioned  
above, which was later cancelled after a constitutional court decision).  
The fragility of the coalition implies upside risks for the public deficit  
and debt in the future.  
In terms of financing, the central bank’s support was limited, because  
its securities purchases (0.4% of GDP) aimed simply to smooth liquidity  
in the secondary market and not to finance the public debt. Implemen-  
tation of the 2021-27 European budget and the European recovery plan  
should provide a bigger financial windfall, with potential cumulative  
disbursements of EUR 8 bn a year via subsidies in 2021 and 2022. This  
is the equivalent of nearly half of the projected fiscal deficit in both  
years.  
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5
4
3
2
1
0
2
015  
2016  
2017  
2018  
2019  
2020  
2021  
CHART 2  
SOURCE: DATASTREAM  
CREDIT RISK: MANAGEABLE FOR THE MOMENT, BUT The risks generated by the natural growth of lending, in contrast, could  
evolve differently. A major part of this lending is generated by housing  
SEVERAL POINTS ARE WORTH MONITORING  
loans for households. Over the past ten years, they have increased  
by nearly 12% a year on average, and are expected to rise further  
in 2021, by nearly 18%. In 2019, the household debt to income ratio  
The government granted the non-financial private sector a morato-  
rium on debt payments. Applications were initially covered through the  
was limited to 24%, but this figure has probably deteriorated with the  
end of 2020, but the deadline was later extended to 31 March 2021  
Covid-19 crisis. Moreover, the European Banking Authority reports that  
(
with a maximum grace period of 9 months).  
the exposure of the Romanian banks to real estate companies has  
generated more doubtful loans at the end of March 2021 (13.9%) than  
the European average (2.5%).  
After peaking at 6% in June 2020, the share of loans still under the  
moratorium is very small. Few borrowers used the window opened by  
the waiver, and virtually all of the loans covered by the moratorium  
are now payable again. The non-performing loan ratio for these loans  
was 10.9% at the end of March 2021, compared to an average of 4.5%  
for the European Union. At the same date, however, the non-performing  
loan ratio for all Romanian bank loans outstanding held steady at 3.9%:  
the credit risk on loans subjected to the moratorium was offset by the  
natural increase in lending (+10% in May 2021). Moreover, provisions  
cover 61% of the non-performing loans that arose following the mora-  
torium, one of the highest provisioning ratio in Europe.  
Completed on 5 July 2021  
Stéphane COLLIAC  
stéphane.colliac@bnpparibas.com  
The profitability of Romanian banks picked up strongly with a return  
on equity (ROE) of 17.1% in March 2021. The banks are benefiting from  
the elimination of the bank tax (although it was eliminated in January  
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020, it was still payable in 2020 on net financial assets reported for  
019). Profitability has almost returned to the level that prevailed be-  
fore the tax was introduced. The capital adequacy ratio rose to nearly  
2% in March 2021. Consequently, Romanian banks seem to be well  
positioned to absorb any losses following the moratorium.  
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