UNICREDIT BANK S.A.

 | 

MIHAI PATRULESCU

  |  26.06.2014

Romania – Heading towards a more balanced growth path

Overall, Romania has managed to address the major imbalances of the economy caused by the 2008 global economic crisis, but growth is lagging, as consumers are still deleveraging and remain very risk averse.

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UNICREDIT BANK S.A.

MIHAI PATRULESCU

MIHAI PATRULESCU

SENIOR ACCOUNTANT at UNICREDIT BANK S.A.

Romania’s EU membership has brought an economic boom, on the one hand, and excessive credit growth and the acceleration of imports, on the other hand.

 

Crisis
The first decade of Romania’s membership in the EU has been one of two halves. The period up to September 2008 was characterised by a boom in economic activity. Enthusiasm amongst the EMU member states to draw off the newer EU states as a manufacturing base played an important role, as did widespread reform efforts in the lead up to EU entry. But anchored in part by the prospect of euro adoption, this boom in industry and exports was accompanied by rapid expansion in the non-tradables sectors, leading to excessive credit growth and a rapid acceleration of imports. Romania was plagued by a case of twin deficits, as the current account deficit reached 11.6% of GDP in 2008 and the structural budget deficit stood at 8.5% of GDP.

 

Adjustment
The 2008 global crisis highlighted the extent to which nominal convergence outpaced real convergence in the preceding years. Accelerating exports indicated that the relationship between the tradables sector remained strong, but the nontradables sector was forced to adjust. External sources of capital dried up and Romania was forced to offset its large current account  deficit and swelling budget imbalances.

 

Romania was one of 3 newer EU states to request an IMF/EU programme in 2008/09 (Hungary and Latvia also requested  stand-by arrangements) and is today the only country in CEE (including other CEE states such as Serbia and Ukraine) to maintain constant engagement with the ‘Troika’. The first stand-by arrangement (SBA) amounted to EUR 20bn from the IMF,  the European Commission, the World Bank and other International Financial Institutions (IFIs) and focused primarily on a swift stabilization of fiscal and external imbalances. There has been some significant successes over the  course of this engagement, concentrated primarily within fiscal policy. The first programme set strict fiscal targets, including a ceiling on public sector spending and arrears, though high taxes played a dominant role in consolidation.

 

The authorities introduced a new wage bill for public sector employees, revised social benefits, increased the flexibility of the labour market and enacted a new fiscal responsibility law, which included the setup of a fiscal council, limits on intra-year budget revisions and multi-year budgeting procedures. Romania subsequently signed two other precautionary programs, which were used as an anchor for implementing structural reforms. The programmes acted as a credibility anchor, bolstering transparency on fiscal performance and speeding up Romania’s return to investment grade.

  

 

Even though progress on structural reforms has been slow, Romania is in a significantly healthier fiscal position now. From a structural budget deficit of 8.5% of GDP in 2008, the authorities target a headline deficit of 2.2% of GDP this year. Furthermore, Romania signed the fiscal compact and committed itself to a structural budget deficit of 1% of GDP over the medium run. At less than 40% of GDP last year, public debt is less than half the EU average (85%), though it has increased from less than 15% of GDP since before the global financial crisis. Overall, Romania has managed to address the major imbalances of the economy, but growth is lagging, as consumers are still deleveraging and remain very risk averse.

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