Romania's economy has performed better than expected under the impact of the COVID-19 pandemic, despite political uncertainty. However, after the center-right coalition fell apart in 2021, the hopes for reform and sustainable economic growth in the following years are pinned on the EU money that will come under the Resilience Facility.

In November 2020, the European Commission was forecasting 3.3% economic growth in 2021 - not enough to compensate what was expected at that time to be a 5.1% slowdown in the year Covid-19 hit the world. Even under the most pessimistic estimates, the economic recovery was at least double in 2021: close to 7%. While the slowdown was not so steep as initially believed: only 3.8% in 2020.

Despite the unexpected economic recovery from the most acute stage of the Covid crisis (the lockdown quarter, Q2 of 2020) - a recovery visible in Romania as well as abroad - the country’s economic outlook at the end of 2021 seems less optimistic than expected a year ago. High inflation and utility bills already prompted social unrest. Still, the economic growth is expected to remain robust (4.6%, under Government’s projection).

Primarily, the gloomy economic outlook is driven by the volatile developments of the health crisis: the vaccine failed to bring a quick (or even predictable) end to the pandemic, with the new wave of infections that currently spreads across Europe expected to hit Romania in January-February 2022. On the upside, the Resilience Facility (EUR 29 bln expected until 2026) and the commitments attached provide a key anchor for positive developments in public administration modernisation, public investments and for regulatory predictability. The Excessive Deficit Procedure will also provide more discipline in the fiscal sector. 

Administrative capacity remains a weakness

Rather concerned about the electoral polls, the new ruling coalition looks unprepared to address the new challenges generated by the health crisis and the milestones/targets to be met under the Resilience Facility. The former centre-right Government managed to sketch a Recovery Plan aimed at bringing the EUR 29 bln of grants and soft loans, but it remains largely unknown what the money will be spent on. The new Government, dominated by the Social Democrats, have expressed certain criticism against the National Recovery and Resilience Plan (PNRR).

The continuing Covid crisis and the unreformed, unprepared public administration are not the only issues dragging down the economic outlook: inflation proved to be not so transitory as initially believed, the energy crisis is hardly just a temporary incident caused by too fast economic recovery and the global merchandise transport turned into a logistic nightmare and prevent the trade chains from regenerating.

Price stability is a major challenge, as industrial prices soared by 27% yoy in October 2021

The households’ utility bills were subsidised by the Government, but the high energy prices are gradually forcing factories out of the market: Azomures fertilizers producer suspended activity during the winter and Alro ponders to reduce production over a longer period of time.

Finally, the entire region including Romania was hit by the microchip crisis that poses major problems in the automotive industry, a sector that is so important for most of the countries in central and eastern Europe. This means wider trade(and current account) deficit and subdued industrial activity - which recently came under pressure from the energy prices.

In Romania, the sudden and hardly explainable deterioration of the political outlook adds even more pessimistic notes to the economic outlook. The country lost a reformist President, Klaus Iohannis, who deeply disappointed the reformist voters when bringing back the Social Democrats (PSD) as de facto senior ruling party, just because he couldn’t keep under control the ministers of reformist USR.

The real sector of the economy performed above average in 2021, thanks to a bumper crop, the constantly growing sector of IT&C and base effects. The industry recovered on low base effects and the services on a combination of strong demand and low base effects. Overall, the country’s GDP expanded by 7.1% yoy in January-September.

The financial sector thrived in 2021 as the banks boasted record profits. Helped by Government guarantees for retail mortgage loans (Prima Casa) and corporate loans (IMM Invest), the portfolio of bank loans expanded by a record rate of 16% yoy as of the end of November. Bank experts expect the pace to slow down in the coming years.

The Romanian banking system posted RON 6.4 bln (EUR 1.3 bln) aggregated net profit in January-September, 37% more than in the same period of 2020 and 24% more compared to the same period of 2019. The banking system’s non-performing loan ratio dropped to 3.7% at the end of September from 4.1% one year earlier and 4.4% in the mid of 2020 during the climax of the crisis.

On the downside, the rising inflation will predictably force the central bank to take more hawkish actions and more rate hikes (from 1.75% currently) are expected as the inflation will peak at 8.6% as of June 2022 9central bank’s projection).

Romania’s public sector went in line with the plans - which were drafted, however, based on expectations for slower economic recovery. Under this aspect, the 7% of GDP public deficit (possibly slightly smaller) reflects Government’s passive stance: it captured the benefits of quick recovery but will have a tough job in 2022 when no deferred budget revenues will be recorded. 

Romania's budget deficit narrowed to RON 56 bln (EUR 11.3 bln) in the first eleven months of 2021, one-third less than the gap in the same period of 2020, according to data published by the Finance Ministry on December 27. The improvement was steeper in terms of per-GDP terms: from 7.9% to 4.7%. Under its latest budget revision, the Government targets a deficit of 7.13%-of-GDP, down from 9.8%-of-GDP in 2020. For 2022, it targets a 5.84%-of-GDP deficit, in line with the trajectory towards a gap of under 3% of GDP in 2024.

Notably, however, the country’s public debt remained under 50% of GDP thanks to robust nominal GDP growth (inflation played a role).

Romania's external balance has deteriorated as it was hit from multiple directions: subdued automobile production, the biggest refinery (Petromidia) being shut down nearly half of the year and robust domestic demand. The current account gap is expected to remain under pressure as the Resilience Plan boosts domestic demand - but part of the gap will be financed from the EU funds recorded under the Capital Account (non-debt generating).

Romania’s current account deficit hits 6.9% of GDP in 12 months to October. Its current account deficit in the 12-month period to October has widened by 57% yoy, reversing a small 7% y/y contraction posted for the comparable period to October 2020.

iulian@romania-insider.com

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