Romania’s economic outlook: Ease of resilience is key anchor in 2022 as reformist government collapses


The Romanian economy has performed better than expected under the impact of the COVID-19 pandemic, despite political uncertainty. However, following the collapse of the center-right coalition in 2021, hopes for reform and sustainable economic growth in the following years rest with EU money that will come under the Resilience Facility.

In November 2020, the European Commission forecast economic growth of 3.3% in 2021 – not enough to offset what was predicted at the time as a 5.1% slowdown in the year Covid-19 hit the world . Even according to the most pessimistic estimates, the economic recovery was at least double in 2021: almost 7%. While the slowdown has not been as brutal as initially believed: only 3.8% in 2020.

Despite the unexpected economic recovery from the most acute phase of the Covid crisis (the containment quarter, Q2 of 2020) – a visible recovery in Romania and abroad – the country’s economic outlook at the end of 2021 appears less optimistic than expected a year ago. High inflation and utility bills have already caused social unrest. Nevertheless, economic growth should remain robust (4.6%, according to the government projection).

The gloomy economic outlook is mainly due to volatile developments in the health crisis: the vaccine has failed to bring a rapid (or even predictable) end to the pandemic, the new wave of infections that is now spreading across the country. Europe should hit Romania in January-February 2022. On the positive side, the Resilience Facility (29 billion euros expected until 2026) and the commitments attached to it constitute a key anchor point for positive developments in terms of public administration modernization, public investment and regulatory predictability. The excessive deficit procedure will also bring more discipline in the budgetary sector. ___STEADY_PAYWALL___

Administrative capacity remains a weakness

Rather concerned about election polls, the new ruling coalition does not seem prepared to meet the new challenges generated by the health crisis and the milestones / objectives to be achieved within the framework of the resilience mechanism. The former center-right government succeeded in sketching out a recovery plan aimed at bringing in the 29 billion euros in subsidies and subsidized loans, but it is still unclear what this money will be spent on. The new government, dominated by the Social Democrats, has expressed some criticism of the National Recovery and Resilience Plan (PNRR).

The continuing Covid crisis and the unreformed and unprepared public administration are not the only problems weighing on the economic outlook: inflation has turned out to be less transitory than initially believed, the energy crisis is Little more than a temporary incident caused by too rapid an economic recovery and global freight transport has turned into a logistical nightmare and is preventing trade chains from regenerating.

Price stability is a major challenge, as industrial prices climbed 27% year-on-year in October 2021

Household utility bills were subsidized by the government, but high energy prices are gradually pushing factories away from the market: fertilizer producer Azomures has suspended operations during the winter and Alro plans to cut production on a longer period.

Finally, the whole region including Romania has been hit by the microchip crisis which poses major problems in the automotive industry, a sector so important for most of the countries of Central and Eastern Europe. This means a larger trade (and current account) deficit and moderate industrial activity – which has recently come under pressure from energy prices.

In Romania, the sudden and difficult to explain 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 reformist voters by bringing back the Social Democrats (PSD) as the top de facto ruling party, simply because he could not keep it under control the ministers of the reformist URS.

The real sector of the economy performed better than average in 2021, thanks to a bumper harvest, the steadily growing IT&C industry and base effects. Industry recovered from weak base effects and services from a combination of high demand and weak base effects. Overall, the country’s GDP grew 7.1% year-on-year in January-September.

Financial sector flourished in 2021 as banks posted record profits. Helped by state guarantees on real estate loans to individuals (Prima Casa) and loans to businesses (IMM Invest), the bank loan portfolio grew at a record rate of 16% year-on-year at the end of November . Banking experts expect the pace to slow down in the coming years.

The Romanian banking system posted an aggregate net profit of 6.4 billion RON (1.3 billion euros) in January-September, which is 37% more than in the same period of 2020 and 24% of more compared to the same period of 2019. The banking system’s NPL ratio fell to 3.7% at the end of September from 4.1% a year earlier and 4.4% in mid-2020 at the height of the crisis.

On the downside, rising inflation will, as might be expected, force the central bank to take more hawkish measures and further rate hikes (currently 1.75%) are expected as the inflation will peak at 8.6% according to the central bank’s projection for June 2022).

The Romanian public sector has complied with the plans – which were, however, drafted on the basis of expectations of a slowdown in the economic recovery. In this respect, the public deficit of 7% of GDP (perhaps slightly lower) reflects the passive position of the government: it has benefited from a rapid recovery but will have a difficult task in 2022 when no deferred budget revenue will be recorded. .

Romania’s budget deficit narrowed to RON 56 billion (€ 11.3 billion) in the first eleven months of 2021, a third less than the gap in the same period of 2020, according to data released by the Ministry of Finance on December 27. The improvement was steeper in terms of GDP: from 7.9% to 4.7%. In its latest budget revision, the government is targeting a deficit of 7.13% of GDP, against 9.8% of GDP in 2020. For 2022, it is targeting a deficit of 5.84% of GDP, in line with the trajectory towards a gap of less than 3% of GDP in 2024.

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

Romania’s external balance has deteriorated as it has been affected in several ways: sluggish automobile production, closure of the largest refinery (Petromidia) almost halfway through the year and robust domestic demand. The current account gap is expected to remain under pressure as the resilience plan stimulates domestic demand – but part of the gap will be funded by EU funds recorded in the (non-debt) capital account.

Romania’s current account deficit reaches 6.9% of GDP in 12 months until October. Its current account deficit in the 12-month period to October widened 57% year-on-year, reversing a small 7% year-on-year contraction recorded for the comparable period to October 2020.

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