Emerging

Walking on a tightrope

EcoEmerging// 2nd quarter 2020  
11  
economic-research.bnpparibas.com  
Romania  
Walking on a tightrope  
Romania’s economy has become gradually unbalanced in recent years, ending 2019 with significant twin deficits, i.e. both a fiscal  
deficit and a current account deficit. An accommodative fiscal policy has stimulated growth and should continue to do so. Even so,  
Romania will not avoid a contagion effect due to the COVID-19 pandemic’s economic fallout. The country is bound to slip into  
recession even though growth has already dwindled. Though foreign currency liquidity is still sufficient, its relatively low level  
could constrain monetary policy: a stable exchange rate is key for an economy that still has a significant amount of euro-  
denominated debt, albeit much less than before.  
Romania will not avoid recession  
1- Forecasts  
In 2019, Romania’s economy showed a few signs of cyclical  
overheating, with strong wage pressures (+11.6% y/y in November  
2
018  
4.5  
2019  
4.2  
2020e  
-4.8  
2021e  
6.3  
Real GDP growth (%)  
2
019), a resolutely expansionist fiscal policy, and a current account  
Inflation (CPI, year average, %)  
Budget balance / GDP (%)  
Current account balance / GDP (%)  
4.6  
3.8  
2.8  
3.0  
deficit that swelled to 4.7% of GDP in 2019.  
-3.0  
-4.4  
-4.2  
-7.5  
-5.9  
-4.7  
-1.9  
-3.6  
Before the COVID-19 shock, however, growth was already  
beginning to wind down, notably due to the slump in the European  
automobile sector (23% of Romania’s merchandise exports), which  
carried over to Romania’s industrial production, with automobile  
production declining 4.3% y/y (3-month moving average for the  
period ended 31 January).  
e: BNP Paribas Group Economic Research estimates and forecasts  
2
- Industrial production and production expectations  
Industrial production (Y/Y, 3MM, LHS)  
Business confidence, production expectations (RHS)  
2
5%  
0%  
5%  
0%  
30  
2
1
1
According to cyclical surveys available through March, household  
spending should weaken as consumers take into account their past  
and future loss of purchasing power, which should lead them to  
scale back plans for durable goods purchases. In 2019, household  
consumption contributed 4 percentage points (pp) of the country’s  
2
1
0
0
0
5
0
%
%
- 5%  
- 1 0%  
- 1 5%  
20%  
25%  
4.2% growth.  
-10  
-20  
-30  
The COVID-19 shock will squeeze exports, which have already  
been in the midst of a slowdown (+1.9% in 2019 vs. +8.1% in 2018).  
Sluggish European demand (77% of Romania’s merchandise  
exports) was already accompanied by plant closures, especially in  
the automobile sector. The expected decline in exports is likely to  
cut GDP growth by 4 percentage points. Faced with this  
environment, investment should contract by nearly 10% in 2020,  
after increasing 5.6% a year during the two previous years. Wage  
growth is also expected to halt abruptly, straining household  
consumption. Tourism will also be affected, but at 3% of GDP, its  
weighting is relatively small despite the sector’s vibrant growth in  
recent years.  
-
-
07  
08 09 10 11 12 13 14 15 16 17 18 19 20  
Source: Eurostat, DG Ecfin  
Fiscal policy further at play  
In 2019, Romania’s public finances were marked by a fiscal deficit  
of 4.2% of GDP, which exceeds the 3% limit set down in the  
European treaties. The prospects of another budget overrun would  
have triggered an excessive deficit procedure. But with the COVID-  
1
9 crisis and the fiscal policy responses EU member states have  
taken, there is likely to be more leniency towards the 3% rule.  
Consequently we expect to see Romania’s fiscal deficit continue to  
widen.  
All in all, Romania is likely to report negative growth in 2020,  
estimated at -4.8%. Running a current account deficit, however,  
growth is dependent on the international situation, notably for  
financing. The main cyclical support factor will be the decline in oil  
prices, which are expected to average USD 38 a barrel this year,  
down from USD 65 in 2019. This should help hold down inflation to  
The first reason is that the ruling coalition led by Prime Minister  
Ludovic Orban’s National Liberal Party (PNL) managed to stay in  
power, and a new government was formed in March 2020  
(
legislative elections are scheduled for December 2020). Last year’s  
2.8%, which would give monetary policy a little more leeway.  
decision to increase pensions by 40% should take effect in  
September 2020. The second reason is the economic stimulus  
package that was adopted to cope with the impact of the COVID-19  
crisis (2% of GDP). The stimulus includes funding for partial  
unemployment (to maintain 75% of wages), guaranteed loans for  
Yet the existence of major twin deficits at a time when financing will  
be much harder to secure implies a downside risk in terms of  
economic growth.  
EcoEmerging// 2nd quarter 2020  
12  
economic-research.bnpparibas.com  
SME (RON 10 bn initially, 1% of GDP), and the deferral of corporate  
tax payments due in the second quarter.  
3- Foreign exchange reserves and exchange rates  
The government has also postponed loan repayment scheduled for  
companies and households for the next nine months, and stipulated  
that the cost of the measure would be carried by public finances,  
and not the banks, which would not need to set aside provisions.  
This is an important measure because it ensures that Romania’s  
banking sector will have the capacity to absorb the rise in non-  
performing loans. Non-performing loans are still substantial,  
accounting for 4.6% of loans outstanding in Q3 2019, even though  
they have fallen sharply from the 2013 peak of 22% of loans  
outstanding. The reduction in the loan to GDP ratio (from 40% in  
Foreign exchange reserves in EUR bn (LHS)  
Exchange rate RON/EUR (RHS, inverted scale)  
45  
3
3,2  
40  
3
3
3
4
4
4
4
,4  
,6  
,8  
35  
30  
25  
20  
,2  
,4  
,6  
1
5
0
5
0
1
4,8  
5
2008 to 26% at year-end 2019) is a risk-mitigation factor, but it must  
be paired with another risk factor: the steady increase in household  
loans (+27% over the past three years).  
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20  
Source: CEIC  
The Central Bank has also cut its key rate by 50 basis points to 2%,  
and narrowed the interest rate corridor. This reduced the Lombard  
rate, the key lending rate, by 100 bp to 2.5%, which is designed to  
help pull down interbank rates. It also implies the stability of the  
deposit facility rate (1.5%), to avoid penalising the Romanian leu  
exchange rate (RON). Despite a few ups and down, the leu had only  
lost 1% against the euro at the end of March 2020 compared to  
year-end 2019. The central bank also declared that it would provide  
the banking system with as much liquidity as necessary, via repo  
operations and purchases of RON-denominated public debt, to  
maintain liquidity at satisfactory levels. The central bank also said it  
was considering easing monetary policy further, either through  
policy rate cuts or lowering the required reserve ratio of banks.  
be supportive. Yet there is also the risk that the rating agencies  
could downgrade its sovereign rating due to the wider fiscal deficit.  
Our central scenario still calls for a mild depreciation in the  
exchange rate towards RON 5 to the euro by the end of 2020 (from  
RON 4.83 at the end of March), even if there is further monetary  
easing. If the leu were to depreciate significantly, the risk would be  
much more moderate for households, whose foreign currency debt  
has declined from 60% of total household debt at year-end 2014 to  
24% at year-end 2019. For non-financial companies, 42% of  
domestic credit is still denominated in foreign currencies (essentially  
the euro).  
At 50% of GDP at the end of 2019, external debt has been cut back  
sharply thanks to debt reduction efforts following the 2013 crisis. It  
has begun to rise again in recent years for two reasons: government  
borrowing (EUR 40 bn in external debt) and intercompany loans  
(EUR 32.7 bn). Adding short-term debt to long-term debt reaching  
maturity in 2020, the total amount of external debt maturing in 2020  
reaches USD 56 bn, the majority of which are intercompany loans.  
In a central scenario in which the financial consequences of the  
COVID-19 crisis remain moderate, this debt should be rolled over  
(since these loans are often tied to foreign ownership).  
Twin deficits are limiting policy mix leeway  
The public deficit is expected to widen sharply in 2020, to -7.5% of  
GDP, reflecting fiscal policy measures but also the impact of the  
probable increase in unemployment (4% of the active population at  
year-end 2019). Romania’s twin deficits increase its vulnerability to  
a deterioration in financing conditions: 10-year yields on government  
local currency bonds rose to 5.8% on 16 March. Central bank  
purchases of public debt helped stabilise rates at 4.8% at the end of  
March, which is still high (close to the March 2019 level, even  
though inflation is lower now).  
Until 2019, however, the widening of the fiscal deficit did not have a  
very big impact on the level of the public debt (36% of GDP in 2019),  
mainly because nominal growth was sufficient to stabilise the debt  
ratio. Things will be different in 2020 as the deficit widens and  
nominal growth declines. The public debt ratio could rise to 40% of  
GDP, which is still a reasonable level.  
Yet the sharp drop in oil prices will reduce the current account deficit  
significantly, on top of a volume effect (fewer imports due to a  
contraction in domestic demand, notably due to a decline in  
investment). As a result, we are looking for a current account deficit  
of only 1.9% of GDP in 2020, vs 4.7% in 2019. This will limit the risk  
of a decline in foreign reserves, offsetting a possible contraction in  
capital flows. In September, Romania’s sovereign debt will be  
incorporated in the Barclays Global Aggregate index, which should  
QUI SOMMES-NOUS ? Trois équipes d'économistes (économies OCDE, économies émergentes et risque pays, économie bancaire) forment la Direction des Etudes Economiques de BNP Paribas.
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