A decade after joining the European Union, Romania's
overall macro picture looks stable, although potential tensions
may be spotted on the fiscal front, while uncertainties in the
external environment persist.
Inflation has gradually exited the negative territory
triggered by the impact of successive VAT cuts and imported
deflation (low commodity prices worldwide). Annual CPI
inflation, at 0.6% in May, is set to re-enter the target's
variation band of 1.5%-3.5%, with a relatively softer dynamic
this year but perhaps a steeper slope in 2018.
Economic growth is likely to stay above potential after a
4.8% GDP advance in 2016 – the fastest in recent years
– mainly driven by private consumption, under the
impact of fiscal easing. The Q1 2017 data already showed a 5.6%
GDP year-on-year rise, placing Romania at the top of the EU's
fastest growing economies.
Import dynamics outpaced that of exports, with the current
account deficit (2.3% of GDP in 2016) autonomously financed.
With wage rises still above productivity amid fiscal stimulus
and tight labour market conditions, the competitiveness of
Romanian entrepreneurs remains on the radar.
Real monetary conditions have been stimulating. The National
Bank of Romania's (NBR) key policy rate has been flat at 1.75%
since May 2015, while the Bank pursued an adequate liquidity
management so money market rates were hovering at even lower
levels, near the NBR's deposit facility, being close to those
of our regional peers.
Minimum reserve requirement ratios were gradually cut to 8%
on both hard-currency and local-denominated liabilities against
pre-crisis highs of 40% and 20%, respectively. Their
harmonisation with EU levels along with a normalisation of the
corridor around the policy rate is to continue once conditions
are deemed adequate, in line with the price stability objective
and given the swings in global capital flows.
Private credit's advance went on, while its improved
structure – leu-denominated loans' share in the total
non-government credit hovering at 60% versus 34% in 2012
– contributes to a more efficient monetary policy
transmission, while helping to mitigate the risks to financial
Financial stability indicators show the Romanian banking
sector remained robust after weathering the crisis with no
state bail-outs. Risks have moderated amid portfolio
cleanouts – the NPL ratio fell to 9.3% from a peak of
22% and is set to slide below the EU average – and a
diminished impact of some legislative initiatives.
Nevertheless, the sector, dominated by European banks, has yet
to reach its full potential to be a catalyst for convergence as
high solvency ratios and excess liquidity indicate some
resources are not fully used.
At the current juncture, the relevant risks to price
stability are related to fiscal and income policies as well as
to persistent uncertainties regarding the external environment,
including euro area and global inflation and growth outlook and
oil/food price volatility.
Romania's GDP per capita is converging towards the EU
average – now near 60% versus 43% a decade ago
– but its budget revenues are at the lowest level as a
share of GDP. Given labour market tensions, wage rises in both
private and public sectors are unavoidable but the appropriate
dosage, magnitude and timing are essential.
Therefore, efforts aimed at maintaining a sound policy mix
along with the implementation of structural reforms are needed
to preserve the hard-won macroeconomic stability and move
further ahead on the convergence path.