Romania econ

For eastern European economies like Romania, the unsettled times continue. The pandemic hit economic growth and now the war in nearby Ukraine, coupled with high energy prices and rising inflation, could lead to renewed challenges. Kit Gillet reports.

In a March note, Oxford Economics said that central and eastern European countries are among the most exposed to the economic impact of Russia’s invasion of Ukraine, with gross domestic product (GDP) across the region forecasted to drop by an average of 1 percentage point in 2022 and 0.5 in 2023.

In early April, Romanian authorities initiated talks with the European Commission over a comprehensive support package for households and firms, estimated at €3.5bn, with the largest share going towards social measures targeting low-income households, as well as measures aimed at supporting companies hit by the effects of the war.

Still, there are also positives on the horizon, in the form of NextGenerationEU (NGEU) funds that will see billions pour into the Romanian economy, especially in areas related to the green transformation.

Sluggish growth ahead

Romania’s economy expanded by 5.9% in 2021, according to revised provisional data from the country's statistical board, after contracting by 3.7% in 2020. In the fourth quarter of 2021, the economy grew by 2.4% year-on-year, with industrial output up 5% across 2021, imports of goods and services up 13.7% and exports up 11.1%. In contrast, the agricultural sector saw an annual drop of 13.5% throughout the year.

The central bank has already hiked rates and they will continue to do that

Ionut Dumitru

In late March, the European Bank for Reconstruction and Development (EBRD) cut its forecast for Romanian economic growth from 4.4% to 2.8% for 2022, a significant drop partly linked to the fighting taking place across its northern border.

“Foreign direct investment may be delayed in countries closer to Ukraine, such as Bulgaria and Romania, especially in the context of a militarisation of the Black Sea,” said the EBRD. In 2023, it expects Romania’s GDP to expand by 4.2%, after rising by 6% in 2021.

Other forecasts are even less rosy. The World Bank expects Romania’s economy to grow by just 1.9% in 2022, with risks strongly tilted to the downside. Fitch Ratings, meanwhile, said in an April update that Romania’s GDP growth would slow to 2.1% in 2022, as it affirmed the country’s credit rating at BBB- with a negative outlook. This, it said, reflected both Romania’s EU membership and EU capital flows that support investment and macro-stability, but also heightened challenges that come with rising inflation, steep increases in commodity prices and weaker growth in Romania’s many trading partners.

War in Ukraine

According to Valentin Tataru, chief economist at ING Bank Romania, the negative impact of the conflict between Ukraine and Russia on Romania’s trade balance is marginal, due to Romania’s direct trade links with Russia and Ukraine amounting to around 3% of the country’s total trade volume, compared to 70% with other EU countries.

Instead, Mr Tataru suggests that most of the impact on Romania’s economy will be to confidence. “To the extent that consumers and businesses alike will feel the need to postpone or reprioritise current spending and investment plans,” he says. “Another important indirect effect will be via higher global prices for energy and commodities. Although Romania is the least dependent country in the EU on Russian gas, it is still a price taker for both energy and commodities.”

ING Bank has cut its 2022 GDP forecast for Romania from 3.2% to 2.3% as a result, with inflation projected to rise by 9.3% in 2022, with risks to the upside, according to Mr Tataru.

This could have far-reaching implications on Romania’s public budget.

“The public budget was constructed on an economic growth rate of above 4% of GDP,” says Daniel Dăianu, chairman of Romania’s Fiscal Council. “I think we should be happy if we end the year with something between 2% and 3%. The war gives another push to rising inflation, but it’s much more connected with supply chain disruptions, which will continue and which are going to be accentuated by the war and with the crisis in commodity markets.”

In 2020, Romania’s headline deficit reached 9.2% of GDP, in part due to the impact of the global pandemic. The country’s debt-to-GDP ratio rose from 35.3% at the end of 2019 to 48.9% at the end of 2021 and 50.6% at the end of February, in what is a worrying trend.

Fitch has said that under its baseline scenario Romania’s public debt-to-GDP ratio would increase to 55.2% in 2023, with public debt dynamics remaining vulnerable to potential changes in market sentiment and adverse policy changes. The rating agency pointed to persistent macro imbalances, including a large external deficit, that could limit Romania’s policy responses in the event of macro shocks, adding that it expects a budget deficit of 7.1% in 2022 and 5.8% of GDP in 2023, which is among the largest deficits among BBB-rated sovereigns.

Still, Mr Dăianu says: “I continue to believe that Romania is underrated. It is true that it has a very large budget deficit and the mission to reduce it in three [or] four years’ time is very ambitious, but there is also the potential to raise fiscal revenues significantly.”

Rising interest rates and inflation

In April, Romania’s central bank, the National Bank of Romania (BNR) raised its benchmark interest rate by 50 basis points (bps), to 3% – its fifth rate rise in a row. The bank also raised its lending rate by 50bps to 4%. These are unlikely to be the last rises of 2022.

“We think that a deteriorating inflation outlook means that rates will rise above 5% later this year,” wrote Liam Peach, an emerging Europe economist at Capital Economics, in a client note shortly after the latest interest rate rise was announced.

According to BNR, annual inflation climbed to 8.19% in December 2021, from 7.80% in November. However, since then, inflation has grown steadily. Consumer prices in Romania rose by 10.2% year-on-year in March, according to Romania’s national statistical office, up from 8.53% in February, with food prices up 11.2%. The last time Romania reported double-digit inflation was back in 2004.

“We are concerned about inflation,” says Ionut Dumitru, chief economist at Raiffeisen Bank Romania, one of the largest banks in the country. “The prices for food are going up, but that is a common trend for everybody. This is the new name of the game for the next years: higher energy prices, higher food prices and inflation will be quite high. The central bank has already hiked rates and they will continue to do that.”

Romania’s central bank is forecasting a peak in inflation at the end of the first quarter of 2022, followed by a downward trend over the following 18 months. In the meantime, the government has placed a cap on electricity and gas prices for households and many companies, lasting until at least April 2023, in order to limit the impact of rising prices. It can do this because many of Romania’s energy suppliers remain state-owned companies.

Romania’s average net wages, meanwhile, have also been increasing steadily, by 8.9% year-on-year in January, to hit the equivalent of €748 a month, according to Romania’s statistics office, with wages up 0.5% year-on-year in real terms. 

NGEU funds

There are, however, some positives on the horizon. In September, Romania approved its Recovery and Resilience Facility (RRF), as part of EU-wide post-pandemic recovery efforts. As a result, Romania is set to receive €14.2bn in grants and €14.9bn in loans over the next five years, which together represent 13.7% of Romania’s 2020 GDP. More than half of the money is earmarked for ‘green transition’ initiatives, including investments in rail infrastructure and electric vehicle recharging stations, with plans to also include a commitment to phase out coal and lignite power production by 2032.

According to government estimates, NGEU funds are expected to help boost real GDP levels to between 3.4% and 5.4% between 2021 and 2026.

“NGEU is our chance to emerge stronger and to reshape our economy, becoming a society that encourages material wealth,” says Sergiu Manea, chief executive of Banca Comerciala Romana (BCR). “Romania needs investment in large modernisation projects and the RRF, the key instrument at the heart of NGEU, can be used to transform the Romanian economy on all fronts.”

Money is also pouring into Romania from other channels. Between now and 2027, the country is expected to receive more than €80bn in funding from various other EU initiatives, according to Fitch estimates, equivalent to 37% of annual GDP.

“The considerable EU funds allocated to Romania – €80bn in the horizon of five to eight years – offer the country the chance of developing its infrastructure and energy sector in a sustainable way,” says Mihaela Bitu, chief executive of ING Bank Romania, who adds that the current geopolitical context could also drive a wave of nearshoring, with Romania ultimately benefiting from higher foreign investment. In the larger scheme of things, this is a potential silver lining in an otherwise worrying year or two ahead.


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