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Romania: Staff Report for the 2015 Article IV Consultation

Author(s):
International Monetary Fund. European Dept.
Published Date:
March 2015
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Background

1. Romania has in large part reduced internal and external imbalances. This has been achieved through impressive fiscal consolidation and prudent monetary and financial policies, broadly in line with the 2012 Article IV recommendations (Annex I) and the 2011 and 2013 precautionary Stand-By Arrangements (SBA). However, a negative output gap persists, inflation is well below target and income convergence with the EU has been slow. Weak infrastructure has emerged as a bottleneck for a higher growth trajectory, reflecting ineffective public spending and weak medium-term planning, delayed EU funds absorption and slow SOE reforms. At the same time, Romania remains vulnerable to global and euro area shocks, given its relatively high level of external debt. While fiscal and foreign exchange reserves provide a buffer and non-performing loans were reduced substantially, private balance sheets need to be strengthened further.

2. The reform momentum, however, has slowed amid elevated political uncertainty. General elections in December 2012 resulted in a period of political stability that lasted until February 2014 when the ruling social democratic-liberal alliance broke down. Since then, two new cabinets were formed with changes in key economic ministries that have complicated policy continuity. The surprising win by the centre-right President Iohannis in the December presidential elections has raised near-term political uncertainty as the opposition is striving to form a new government through changing the parliamentary majority. The political uncertainty has affected the implementation of structural reforms, in particular as regards SOEs and gas price deregulation, which has delayed the completion of the third review under the SBA (scheduled originally for June 2014). Nonetheless, some progress has been made toward tackling corruption as evidenced by the 2015 Correction and Verification Mechanism for Romania that pointed out progress in a number of governance areas.

Recent Economic Developments

3. Following robust growth in 2013–14, Romania’s GDP almost returned to its pre-crisis level; however, a sizable output gap remains. Robust export growth was the initial driver of economic recovery while domestic demand remained weak and lagged behind those in peer countries (Figure 1). Recently, however, the recovery has been supported by a pick-up in private consumption on the back of rising real disposable income and low interest rates. Investment, however, has remained subdued. On the supply side, after a strong agricultural harvest in 2013, robust industrial output supported economic activity in 2014. Helped by the recent rebound in economic activity, labor market conditions improved and the unemployment rate declined to 6.8 percent in 2014. Youth unemployment remained elevated at 23.3 percent in 2014Q3, about 6 percentage points above the pre-crisis level.

Figure 1.Romania: The Crisis Legacy for the Real Economy

Sources: IMF World Economic Outlook; Haver Analytics; and IMF staff estimates and calculations.

1/ Unweighted average for Bulgaria, Croatia, Czech Republic, Hungary, Poland, and Slovakia.

2/ Unweighted average for Estonia, Latvia, and Lithuania. Peak pre-crisis GDP for Estonia and Latvia was 2007.

GDP and Demand Components

(Billion lei, 2010 prices)

Sources: Haver Analytics and IMF staff calculations.

4. Inflation has decelerated substantially over the past two years. Annual headline inflation entered the central bank’s new target range of 2.5 percent (±1 percent) in September 2013 and has subsequently fallen below the lower bound of the target band for most of 2014 (Figure 4). Headline average inflation was at a record low 1.1 percent in 2014, with core inflation at 0.3 percent.1 In January 2015, inflation dropped to 0.4 percent. The fall in inflation reflects both domestic and external factors, including a reduction in VAT on flour and bakery products, low food prices, and a decline in oil prices. Furthermore, a persistent output gap and even slower recovery of domestic demand to its trend level (absorption gap), have also contributed to low inflation.

Figure 2.Romania: External Sector, 2007–15

Sources: Haver; National Bank of Romania; IMF Information Notice System (INS); and IMF staff calculations.

1/ Financial account data follows BPM6 format, so positive numbers represent outflows while negative numbers are inflows.

Figure 3.Romania: Labor Market, 2007–14

Sources: Eurostat; and Haver.

1/ The indicator “employees” refers to the formal civil sector, while “employment” is a broader concept that also includes the informal market, self-employed and defense. The sharp employment drop in 2014 is due to a methodological change.

Figure 4.Romania: Monetary Sector, 2007–15

(Percent)

Sources: Haver Analytics; National Bank of Romania; Consensus Forecast; and IMF staff estimates.

1/ Value equals percent of respondents reporting an increase minus the percent of respondents reporting a decrease.

Deviation from Trend Absorption and Output Gap

(Percent)

Note: The deviation from trend absorption and output gap measures are based on IMF staff calculations and may differ from the European Commission, due to differences in methodology.

Inflation and Two-Year Ahead Inflation Expectations

(Percent)

Sources: Consensus Forecasts and Haver Analytics.

5. Romania has considerably reduced fiscal imbalances. Over the past six years, it relied primarily on expenditure cuts to bring the fiscal deficit to 1.9 percent of GDP in 2014, a 7 percentage point reduction in structural terms (Figure 5). However, both revenues and expenditures under-performed relative to the initial 2014 budget, with almost all of the deficit spending occurring in December. Under-execution of the capital budget and current expenditures (until December) allowed for accelerated payment of obligations related to court-ordered wage claims and restitution as well as the clearance of most government arrears.

Figure 5.Romania: Fiscal Operations, 2007–15

(Percent of GDP)

Sources: Romanian authorities; and IMF staff estimates and projections.

2014 Budget(Percent of GDP)
OriginalOutturnDifference
Revenue32.631.9−0.7
Taxes27.627.3−0.3
Grants2.21.7−0.5
Other2.82.90.1
Expenditures34.833.8−1.0
Current28.428.60.2
Capital 1/6.35.2−1.1
Other0.10−0.1
Deficit−2.2−1.90.3

Includes spending on EU-funded projects and other investment spending.

Source: Romanian authorities IMF staff calculations.

Includes spending on EU-funded projects and other investment spending.

Source: Romanian authorities IMF staff calculations.

Composition of Fiscal Adjustment

Sources: Romanian authorities; and IMF staff estimates.

6. The current account deficit has narrowed significantly. At ½ percent of GDP, the deficit was the smallest in ten years, a sharp drop from almost 13½ percent of GDP in 2007 (Figure 2). While imports of goods and services continued to rise on the back of the domestic demand recovery, exports grew at an even faster pace supported by continued expansion in sales of machinery and transport equipment. Staff’s analysis indicates that domestic push factors, particularly improvement in Romania’s competitiveness, are main contributors to the strong export growth (see Selected Issues paper “Export Performance and External Competitiveness”). The income balance, on the other hand, deteriorated on account of increases in profit repatriation and interest payments. On the financing side, public sector capital inflows remained strong with a continued increase in EU fund absorptions. In contrast, private sector flows remained anemic as Europe-wide deleveraging continued to weigh on FDI, and prompted further intensification of capital outflows.

7. Romania’s financial markets have remained relatively stable. Investor sentiment towards Romanian assets continued to be positive and Romania weathered well three episodes of enhanced volatility for emerging markets since 2013. Standard and Poor’s upgraded Romania to investment grade in May 2014 and Romania successfully tapped international capital markets again in October with a ten-year €1.5 billion Eurobond issuance. Sovereign bond and CDS spreads continued to narrow to record low levels, and the exchange rate remained largely stable (Figure 7). The overall favorable market conditions have enabled the central bank to sustain international reserves at €34.3 billion as of end-January 2015, while making substantial repayments to the IMF.

Figure 6.Romania: Financial Sector, 2007–14

1/ Includes prudential filter, which is being phased out since January 2014. December 2014 is an estimate.

2/ Standard IFRS provisions coverage ratio.

Sources: Dxtime; and National Bank of Romania.

Figure 7.Romania: Financial Developments, 2011–15

Sources: Bloomberg and Haver Analytics.

Bond Flows: ETFs/Mutual Funds

(4 week moving total, million US dollars)

Source: Haver Analytics.

1/ Region average weighted by GDP; includes Bulgaria, Hungary, and Poland. Excludes Bulgaria from August.

8. Bank credit growth has turned negative in early 2013. The credit–to-GDP ratio, which rapidly accelerated during the pre-crisis period, is now converging to a trend that is consistent with lower but likely sustainable credit growth. Banks are gradually changing their funding structure towards lei as foreign parent banks continue withdrawing funds from the system, though the pace has slowed. The banking system’s solvency and liquidity position remain appropriate, although additional provisioning requirements have weighed on banks profitability (Figures 6 and 8).

Figure 8.Romania and Peer Countries: Financial Soundness Indicators, 2010–14 1/

1/ Unweighted average of Bulgaria, Croatia, Czech Republic, Hungary, Poland, Slovakia and Slovenia. Return on assets, return on equity and liquid assets to total assets peer average exclude Slovakia. Sources: Haver Analytics, and National Bank of Romania.

Normalization of Credit

(Percent of GDP)

Sources: Haver Analytics, National Bank of Romania and IMF staff calculations.

Parent Funding

(Billion)

Sources: Haver Analytics; and National Bank of Romania.

9. Romania remains one of the poorest members of the EU. Despite a slight decline since 2008, Romania has the second highest at-risk-of-poverty or social exclusion rate in 2013, at 40.4 percent, almost twice as much as the EU average. However, the Gini coefficient in 2012 was below its pre-crisis level, signaling a progressivity of fiscal policy, and the effort to protect the lowest income groups from the fiscal consolidation (IMF, 2014, Fiscal Policy and Income Equality). Supported by the World Bank, some means-tested benefits programs have become better targeted but the envisaged merger of three programs has been delayed. Funding remains relatively tight for means-tested programs when compared to non-means-tested ones.

Outlook and Risks

10. Staff’s baseline scenario projects sustained growth and continued rebalancing towards domestic demand.

  • Growth is projected at 2.7 percent in 2015 and 2.9 percent in 2016. Private consumption is expected to be the main driver, supported by improving consumer confidence, low oil prices, strong real wage growth, and record low interest rates. Investment is set to gradually recover due to greater absorption of EU funds. Potential growth is estimated to reach about 3 percent over the medium term, as higher EU funds absorption, a recovery in credit growth, and improvements in the quality of infrastructure investment through institutional reforms reduce bottlenecks to growth.

  • Inflation is projected to remain low in 2015, reaching an annual average of about 1 percent. Low imported inflation and a persistent negative output gap will likely keep inflation below target for most of 2015, before returning to the target range toward the end of the year. In the medium term, inflation is expected to stay broadly within the target range, as expectations become better anchored.

  • External position. The current account deficit is projected to widen to around 1 percent of GDP in 2015, as domestic demand continues to recover. Over the medium term, staff expects the current account deficit to rise to about 3–3½ percent of GDP, in line with the current account norm for emerging market economies. Capital inflows are expected to pick up only gradually in 2015. While higher EU fund absorptions will support public sector inflows, net capital flows into the private sector are likely to remain low amid a subdued outlook in the euro area.

11. Addressing the infrastructure gap is critical for the medium-term growth outlook. Despite a history of above EU average capital spending (5 percent of GDP over the past decade), Romania’s infrastructure density is low and its quality is perceived to be the lowest in the EU, reflecting inefficiencies and lack of medium-term planning (Box 1; see also Selected Issues paper “Benefits of Boosting Quality Public Infrastructure Spending in Romania”). The mission estimates that ratcheting up EU funds absorption substantially (0.7 percent of GDP annually), if it leads to a greater density and higher quality of infrastructure, could boost the growth potential by about ½ percentage point annually over the medium term.

Box 1.Benefits of Boosting Quality Public Infrastructure Spending in Romania

Romania’s high capital spending has been relatively inefficient in the past. Rail and road infrastructure is particularly deficient. A key factor for this performance is the lack of a robust framework and capacity for developing, vetting, prioritizing, and executing public-investment projects.

Efficiency of Capital Spending in the EU-28

Sources: Eurostat; and World Competitiveness Report.

Total Length of Motorways

(Thousand square km)

1/ Unweighted average of Bulgaria, Czech Republic, Hungary, Poland and Slovakia

Sources: Eurostat.

Staff simulations indicate that increased and more efficient infrastructure spending could boost growth. An immediate boost to efficiency could come from a reallocation of budget resources toward EU-funded projects, which are subject to a more stringent project management process than those funded solely from the state budget. Staff econometric analysis and simulations indicate that the GDP growth rate would be higher by ½ percentage point over the medium term, if available EU-funds were fully utilized.

Growth Benefits From Higher Investment

(Deviation from baseline, percentage)

Sources: IMF staff estimates.

Level Impact From Higher Investment

(Deviation from baseline, percentage)

Sources: IMF staff estimates.

The simulation results are highly dependent on reforms to improve the quality and management of national projects and absorption of EU-funded projects. Despite some reforms under the current SBA, domestic governance and capacity issues continue to undermine absorption of EU-funds. Initial efforts to improve the prioritization of significant projects should be advanced by better aligning the prioritization calendar with the budget calendar in order to ensure that the prioritization process informs budget preparation. In addition, the list of prioritized projects could be published to inform the broader public about the allocation of resources to national priorities, including those identified in the Transport Master Plan currently under preparation. Moreover, better use could be made of technical assistance to enhance Romania’s capacity to absorb EU-funds. In the medium term, Romania should aim to establish one project management process that encompasses all projects notwithstanding funding sources.

Quality of Infrastructure

(Index)

1/ A higher score corresponds to better infrastructure.

Sources: The Global Competitiveness Report, 2013-2014

12. Risks to the outlook, particularly from the external environment, are tilted to the downside (Annex II). Renewed volatility in the global financial market or the euro area related to Greece could adversely impact portfolio flows and lead to deposit outflows. Moreover, a protracted period of slow growth and low inflation in the euro area could put strains on the Romanian economy. Direct economic and financial implications from geopolitical risks should be contained as trade and financial exposures to Ukraine and Russia are moderate and energy dependency is low. Large fiscal buffers, a flexible exchange rate, and an adequate level of international reserves could provide insurance in the event of an external shock. Domestically, continued underperformance of EU funds absorption and absence of structural reforms would delay a much needed infrastructure upgrade.

13. Authorities’ views. The authorities broadly shared staff’s assessment for 2015 but see risks as broadly balanced, given upside potential from agricultural output and EU funds absorption.

Policy Discussions

A. Fiscal Policy: Budgeting and Building Institutions for the Future

14. Sound fiscal policy has lowered vulnerabilities. Public debt, after tripling to 40 percent of GDP during 2007–14, is projected to decline gradually starting this year under unchanged policies, supported by solid debt management and falling gross financing needs. This would provide some room to absorb future shocks, in particular underperformance of real GDP growth or the realization of banking sector contingent liabilities (Annex III). Liquidity buffers are large, amounting to nearly 5 percent of GDP. They include foreign exchange (FX) holdings equivalent to four months of total gross financing needs and a year of FX financing needs. Going forward, the authorities plan to gradually reduce the FX buffer taking into consideration overall global financial market conditions and further progress in deepening government securities markets.

15. In 2015, fiscal policy remains anchored by the medium-term budgetary objective (MTO). The 2015 budget targets a deficit of 1.8 percent of GDP (1.5 percent of GDP in ESA terms). This is consistent with the MTO of 1.0 percent of GDP deficit in structural terms (ESA base) boosted by a 0.25 percent adjuster in 2015 for a faster absorption of EU funds,2 which is expected to pick up as the authorities aim to fully use the funds associated with the 2007–13 programming period. Fiscal policy is thus no longer a significant drag for the economy with just ¼ percent of GDP further consolidation in ESA terms needed next year.

16. However, medium-term spending pressures are building. First, the potential for future restitution and court-ordered payments represents a contingent fiscal liability, potentially amounting to 6 percent of GDP. Second, the 2015 budget foresees higher capital spending to address infrastructure needs. This will require faster EU funds absorption and more efficient public investment. Shifting more projects toward EU funding should ensure more scrutiny and a higher multiplier. Third, the authorities plan to increase defense spending. Finally, Romania faces age-related social spending pressures (estimated cost of 1¾ percent of GDP by 2030). To ensure the financial sustainability of the health care system and improve health outcomes, the authorities are already implementing a comprehensive reform of the healthcare system. They have introduced a basic health package in 2014, which contributes to gradually shifting health services away from hospital-based treatments to more cost-effective ambulatory care, and are revising the reimbursement policy.

17. At the same time, the authorities tentatively aim to lower tax rates possibly putting fiscal discipline at risk. Only about a fifth of the fiscal consolidation since the crisis was revenue based. It left Romania with a relatively high VAT rate (24 percent), increased excises, a new tax on non-building constructions, and one of the highest labor tax wedges in the EU. The revenue measures were later partly offset by a reduction in the VAT rate on bakery and flour products (September 2013), a tax exemption for reinvested profits (October 2014), and a 5 percentage-points cut in the employers’ pension contribution rate (October 2014). A new taxation regime for the oil and gas sector is set to be applied from 2016. Its design should aim at fostering investment while ensuring a fair government take. The authorities also propose for 2016 to lower the VAT rate, excises, and taxes on dividends as well as cancel the tax on non-building constructions with an estimated direct revenue loss of 2.2 percent of GDP. Staff’s baseline scenario does not include the proposed tax changes since the authorities’ plans have not yet sufficiently taken shape. In staff’s view, any tax reduction plans should go hand-in-hand with stronger revenue administration, better compliance—the VAT collection gap is the highest in the EU at 44 percent—and formalizing the economy, in particular, further efforts to advance a risk-based compliance oversight approach, given that at 18.7 percent of GDP the tax revenue-to-GDP ratio is still lower than in most EU member states. Until such reforms deliver results, there is no room to lower tax rates unless fully offset by other fiscal measures, including possibly lower inefficient capital spending until the absorption capacity improves. However, a targeted tax cut for low-income employees or youth could be financed by base broadening and would likely create more employment than the recent broad-based cut (see Selected Issues paper “Cutting Labor Taxes in a Constrained Budget Environment”).

General Government Taxes, 2014

(Percent of GDP)

Sources: IMF World Economic Outlook.

Labor Tax Wedge, 1/

(Single, 50 percent average wage)

1/ Data for 2013, unless denoted by star. Recent data for Cyprus and Croatia are not available. Romania cut employer pension contribution by 5 percentage points effective of October 1, 2014, lowering the tax wedge by about 2.3 percentage points.

Source: European Commission, DG Economic and Financial Affairs.

18. Fiscal structural reforms will be key to sustain the lower deficits.

  • The pension and civil service wage reforms of 2010 were essential pillars for fiscal sustainability. Parametric reforms to the pension system, including the removal of special pension regimes, and the introduction of a unified wage system have helped contain entitlement and wage costs. The public wage bill in 2014 was 1½ percent of GDP below its 2009 peak level and consistent with the 7 percent of GDP cap set through the Fiscal Responsibility Law (when excluding one-off court-ordered payments). However, the subsequent reinstatement of prior pension benefits for select categories of retirees and increases in the minimum wage pose risks. While an adjustment to the pay scale may be necessary, further amendments to the Pension and Unified Wage Laws of 2010 should be considered very carefully.

  • Public expenditure management and tax administration need to be strengthened. The creation of a public investment evaluation unit is an important achievement, but the integration of the project prioritization process into the budget planning and across government levels remains weak. A commitment control system has been pilot-tested and needs to be extended to all public institutions as a safeguard against the re-accumulation of arrears. In addition, efforts to strengthen tax administration, including extension of pilot audits on under-reported labor and modernization of the information systems with support from the World Bank, should advance and the large taxpayer unit should retain its key role. Moreover, fiscal decentralization provides in principle an opportunity to improve service delivery (in social sectors and on public investments), but capacity and governance at the local level should be improved first and fiscal rules (including on local government debt) should be continuously respected (see Selected Issues paper “More Fiscal Decentralization: The Prerequisites”).

Wage and Pension Expenditures

(Percent of GDP)

Sources: Romanian authorities and IMF staff calculations.

Total Cost of Public Investment Projects by Duration (Years), 2013

(Billion lei)

1/ Reflects 322 central-government projects with known dates.

Sources: World Bank, Romanian authorities and IMF staff calculations.

EU Funds Absorption, 2014

(Percent)

Source: European Commission.

Authorities’ views

19. The authorities reiterated their commitment to sound fiscal policies and stronger public financial management. They will determine the preferred timing for reaching the MTO when submitting their Convergence Program to the EC this spring. The authorities propose to reduce tax rates in 2016 and beyond with a view to stimulating the economy and incentivizing shifts from the informal to the formal sector. They estimate that the direct revenue loss of 2.2 percent of GDP in 2016 would be offset by more than half through these dynamic effects (estimated net revenue loss of 0.9 percent of GDP). In addition, the authorities are determined to improve revenue collection and view a reorganization of the large tax payer unit as essential.

B. Monetary Policy: Anchoring Expectations in Uncharted Waters

20. There is room for further monetary easing. The National Bank of Romania (NBR) has implemented monetary policy in an environment of record low interest rates and inflation. In August 2014, the NBR resumed the rate cutting cycle lowering the policy rate since July 2013 by a cumulative 300 basis points to 2.25 percent in February 2015. The rate reductions were accompanied by a narrowing of the interest rate corridor, in line with the staff advice. Moreover, the NBR started to lower the still high minimum reserve requirements (MRRs). The latter, coupled with treasury operations related to growing disbursements of EU funds, has created excess liquidity in the banking system which is likely to stay in the near term. Monetary policy should maintain an easing bias, as lower-than-targeted inflation could become entrenched amid a negative output gap, imported low inflation, and declining inflation expectations.

Selected Interest Rates

(Percent)

Sources: Haver Analytics and National Bank of Romania.

Pass-through of Euro-Lei Exchange Rate to CPI

(Percent)

Source: Selected Issues Paper “Exchange Rate Pass-Through and Inflation Targeting”. The degree of pass through is defined as the ratio of the cumulative impulse response in CPI to one Cholesky standard deviation shock on the euro-lei exchange rate.

21. Staff also recommends a gradual transition of the conduct of monetary policy to a full-fledged inflation targeting regime. This could be achieved by reducing the role of the exchange rate in the policy framework and further narrowing the interest rate corridor. The latter would reduce the gap between the policy rate and interbank rates and help strengthen the clarity of monetary policy signals and the transmission channel. Staff analysis shows that greater exchange rate volatility should be a lesser concern as the share of foreign currency-denominated loans is declining and the exchange rate pass-through has diminished substantially with the adoption of inflation targeting-light (see Selected Issues paper “Exchange Rate Pass-through and Inflation Targeting”).

22. Joining the euro area is the authorities’ medium-term policy objective. Staff views this objective as an important anchor for economic policies, especially for accelerating structural reforms. At the same time, staff called for a careful review of the euro adoption timeline, which is likely to take longer, as joining the euro zone constrains macro-policy options in the face of shocks and requires reaching a sufficient level of real convergence (see also IMF “Central and Eastern Europe: New Member States Policy Forum, 2014”). Romania not only lags in its real per capita income convergence but also in its economic transition when compared to those countries that recently joined the euro area.

Real GDP Per Capita at Time of Euro Area Membership, 2013 1/

(Percent of euro area real GDP per capita)

1/ Data for 2013, except where denoted by star. Euro area membership: SVK (2009), EST (2011), LVA (2014), LTU (2015).

Sources: Eurostat and IMF World Economic Outlook.

EBRD Transition Indicators at Time of Euro Adoption 1/

1/ Euro area membership: SVK (2009), EST (2011), LVA (2014) and LTU (2015). Data for Lithuania and Romania as of 2014. Values range from 1 to 4.3. A value higher than 4 characterizes an industrialized market economy.

Source: EBRD.

23. Staff’s exchange rate assessment indicates that the Romanian leu is broadly in line with medium-term fundamentals. Reserve coverage is generally adequate according to most reserve adequacy metrics (Box 2). Going forward, staff recommends limiting interventions in the foreign exchange market to smoothing excessive volatility and maintaining a prudent stance with moderate reserve accumulation in light of continued downside external risks.

Box 2.External Sector Assessment

Current account. Romania’s current account deficit narrowed significantly over the past two years, largely driven by strong export growth. Notwithstanding a weak external environment, exports of goods and services surged to about 40 percent of GDP in 2013–14 from the pre-crisis level of 25 percent of GDP in 2007. Goods exports as a share of the imports of Romania’s main trading partners have been steadily increasing, with transportation equipment market share in the EU more than doubling from 2008–13. A decomposition of export growth suggests that domestic push factors played an important role in explaining the recent improvement.

Real exchange rate. Standard CGER-type methodologies (Consultative Group on Exchange Rates) for assessing the equilibrium exchange rate suggest that the real exchange rate is broadly in line with medium-term fundamentals. The macroeconomic balance approach indicates that the projected underlying current account deficit is lower than the current account norm of 4.1 percent of GDP. Assuming that only exchange rate changes can deliver a current account adjustment, an appreciation of 3.1 percent would be needed to close the gap between the underlying current account and the norm. Similarly, the external sustainability approach points to a modest undervaluation of 3.2 percent, given that the current account norm required to maintain the international investment position at the current level (60 percent of GDP) is higher than the projected underlying deficit. Finally, taking into account the adjustment in the baseline projection, the equilibrium real exchange rate approach suggests a marginal overvaluation of 2.1 percent. Romania’s average wage has increased following the crisis, broadly mirroring economy-wide productivity gains since end-2008. Caution is needed to ensure that future minimum wage increases do not undermine competitiveness.

Reserve adequacy. Reserve coverage in Romania is broadly adequate according to most reserve adequacy metrics. The reserve level of EUR 34.3 billion at end-January 2015 was above the standard rules-of-thumb for three months coverage of prospective imports and 20 percent of broad money. It was also in line with the new reserve adequacy metric for emerging markets developed by Fund staff. Comparing with the 100 percent short-term debt (at remaining maturity) benchmark, reserves are estimated to have regained a full coverage of short-term external debt by end-2014 after temporarily falling short in 2013 and during most of 2014. The improvement largely reflects a major reduction in short-term external liabilities. Going forward, in light of continued downside external risks, and potential volatility in capital flows, a prudent stance with moderate reserve accumulation remains appropriate.

Gross international reserves vs. traditional metrics

(Billion US$)

Sources: World Economic Outlook, International Financial Statistics, and Fund staff calculations.

Exchange Rate Assessment(Percent of GDP, unless otherwise indicated)
ApproachOver- (+) or Under- (-) Valuation
Macroeconomic Balance−3.1
Current account norm−4.1
Underlying current account−3.3
External Sustainability−3.2
Current account norm−4.1
Underlying current account−3.3
Equilibrium Real Exchange Rate2.1
Source: IMF staff calculations.
Source: IMF staff calculations.

Authorities’ views

24. The NBR was cautious on the speed of moving to full-fledged inflation targeting and agreed with staff’s assessment on external competitiveness and reserve adequacy. Regarding the gap between the policy and interbank rates, the NBR acknowledged the related risk of weakening the signaling power of policy decisions. While a gradual shift to full-fledged inflation targeting is envisaged, the NBR sees a role for the exchange rate as long as euroization in balance sheets is significant. The authorities also recognized the importance of maintaining adequate reserves, particularly against heightened uncertainty in international financial markets, but pointed out that reserve accumulation should also take into account the cost of holding reserves.

C. Financial Sector: Reinvigorating Intermediation

25. The banking sector continues to maintain adequate capital, liquidity and provisioning buffers, and asset quality has improved. Following a comprehensive NBR action plan and EU-wide methodological changes, NPLs declined in 2014 by about 8 percentage points but bank balance sheet repair is still incomplete (Figures 6 and 8). Measures included NPLs sales, write-offs and higher provisioning. NBR stress tests indicate that the solvency of the banking system would generally be resilient to severe scenarios, but require additional capital in a few banks. Instability related to Greece warrants intense monitoring and timely action by the NBR to mitigate the potential impact contagion could have on bank funding. Given the high but falling share of FX-denominated loans (56 percent), indirect FX risk remains the largest risk for the sector. However, pressure from the Swiss franc appreciation is manageable for the banking system, since the share of Swiss franc loans is relatively low at about 4.5 percent of total loans across about 75,000 borrowers. Staff encouraged voluntary bilateral loan restructurings taking into account the repayment capacity of the borrower.

26. Reinvigorating financial intermediation remains a challenge. Foreign bank deleveraging has slowed but together with other supply factors have held back a rebound in credit growth. On the demand side, a scarcity of bankable loans and the relatively high indebtedness of SMEs contributed to negative credit growth. Enabling long-term bank funding—including by adopting a covered bond legislation—and strengthening the existing support schemes for SME lending would benefit intermediation.

27. Legal risks remain a key concern for the banking system. A wave of recent lawsuits based on the Civil Code enacted in 2013 regarding abusive clauses in loan contracts has led to lower court decisions that are being appealed on the grounds that they go counter to market practices. If those verdicts become the basis of class action lawsuits, they could pose a threat to the system’s stability. In response, the authorities have put forward a plan to establish a specialized court that would handle such cases. However, its establishment has been repeatedly delayed for administrative reasons.

28. Romania is in the process of modernizing its insolvency regime but not all elements are yet in place to ensure its efficacy. The new Corporate Insolvency Law has only recently been adopted and experience with its implementation is limited. The authorities are currently drafting a personal insolvency law. Several design issues need to be carefully considered and before adopting the law, the authorities should conduct an impact assessment and broad stakeholder consultations, ensure consistency with the corporate insolvency law, and strengthen the institutional framework to support effective implementation of the law. This is critical in ensuring that the personal insolvency law successfully provides those with unsustainable debt a fresh start without endangering the payment culture.

29. The authorities plan to opt into the EU banking union but have not yet announced a timetable. While many operational issues remain to be resolved, the authorities see merit from opting in before euro adoption as the Romanian banking system comprises mostly subsidiaries of foreign banks. Staff supports the plan but called for careful preparation (see also IMF “Central and Eastern Europe: New Member States Policy Forum, 2014”). In line with euro area practices, the NBR is planning to conduct a third party-led asset quality review of the banking system in late 2015.

30. The non-bank financial sector and its supervisor face important challenges. Significant progress has been made on institutional restructuring of the Financial Supervisory Authority (FSA) since it became the single supervisor of the non-bank financial sector in 2013. A number of barriers to capital market development were removed, which is to be enshrined in a revised capital market law. However, the insurance market is troubled by insolvency issues and weak business practices, which need to be tackled forcefully by the supervisor (Box 3). Legal reforms are urgently needed to enhance resolution powers of the FSA.

Box 3.Need for Reforms in the Insurance Sector

Romania’s insurance sector is non systemic in magnitude but plagued by weaknesses. The sector had a spurt of growth in the last decade but since then stagnated at the pre-crisis level. Total assets stood at about 3 percent of the GDP at end-2013 and total gross underwritten premiums reached 1.3 percent of GDP. There are 39 insurers in the industry many of which are foreign subsidiaries. Non-life business represents about 80 percent of total activity. The sector has considerable weaknesses resulting from a history of lax supervision and enforcement. Intervention and resolution are constrained by shortcomings in the legal framework. Risks for the overall financial sector derive mostly from reputational risks as direct linkages are limited.

The failure of the largest insurer has revealed an urgent need for policy action. A price war in the car and housing insurance lines led to low levels of reserve coverage in some entities. In February 2014, the largest insurance company (Astra, a domestically owned non-life insurer with about 15 percent of market share and mostly in the motor vehicle insurance business) was put under special administration by KPMG. The supervisor needs to move decisively to ensure recapitalization or an orderly resolution. Moreover, the insurance law and the legislation on the insurance guarantee fund need to be urgently amended to enhance the resolution procedures and to provide resolution financing. The European Commission is providing technical support and the FSA will engage in a comprehensive asset quality review with third party involvement later this year.

Authorities’ views

31. The authorities’ views converged to a significant extent with those of staff. They stated the intention to ensure good asset quality in the banking and insurance sectors through regular audits and with the support of third party reviews. The authorities aim to swiftly finalize the legislation for covered bonds and insurance resolution powers.

D. Structural Reforms: Rekindling Momentum and Focusing on Infrastructure

32. Romania needs to advance structural reforms to address its infrastructure gap and improve its growth prospects (Box 1). The poor infrastructure is due partly to the dominance of inefficient SOEs in the transportation and energy sectors where quality of public investment is low. The role of SOEs has shrunk considerably in Romania, but about 1,000 SOEs (of which three quarters are owned by local governments) still play a notable role in key sectors, such as electricity and gas, postal and courier services and transport (see Selected Issue paper “Romanian State-Owned Enterprises: Challenges and Reform Priorities”).

SOE Activity by Economic Sector, 2013

Sources: Ministry of Public Finance; Romanian Fiscal Council; and IMF staff estimates.

Share of SOE Employment in Total Employment, 2013 1/

(Percent)

1/ Majority government-owned SOEs.

Sources: OECD; Ministry of Public Finance; and IMF staff estimates.

33. Despite improvements in the financial performance of some SOE, performance of many others remains weak. Central government-owned SOE arrears have been reduced by 1½ percent of GDP over the past two years, but local government-owned SOE arrears were on the rise and lingered around one percent of GDP at end-2014. In 2013, the SOE sector became profitable following several years of aggregate losses. Profits were concentrated in four energy companies which benefited from electricity and gas market deregulation while the rest continue to be largely loss-making. Losses and arrears are concentrated in a few SOEs of the transport and energy sectors (coal-based energy producers). Their financial weakness remains a burden on the state budget, either directly through transfers or indirectly through foregone revenue. Improving the operational efficiency of some large SOEs will require aggressive restructuring and, in some cases, liquidation.

SOE Arrears and Budget Subsidies and Transfers(Percent of GDP)
Arrears under SBA 1/Total Arrears 2/Subsidies and Transfers 3/
20103.95.31.0
20113.14.70.7
20122.14.30.8
20131.12.80.7
20140.5

Only central government-owned solvent SOEs.

Includes all SOEs except those under liquidation.

2008–09 data covers only central government SOEs.

Sources: Romanian authorities; and IMF staff estimates.

Only central government-owned solvent SOEs.

Includes all SOEs except those under liquidation.

2008–09 data covers only central government SOEs.

Sources: Romanian authorities; and IMF staff estimates.

Net Profit Margin 1/

(Percent)

1/ Excludes four highly profitable energy SOEs.

Sources: Romanian authorities; and IMF staff estimates.

34. Better SOE corporate governance would enhance SOE performance and infrastructure service delivery. SOE corporate governance suffered a setback in 2014, reflected in heavy intervention by line ministries in SOEs decisions. Going forward, strict implementation of good governance principles, underpinned by a stronger legal framework and an effective enforcement mechanism, is needed to rebuild the reforms’ credibility. This also implies adopting the SOE corporate governance law based on recent recommendations from the World Bank.

35. Initial public offerings (IPOs) have expanded the role of private capital in the energy sector while the transport sector lags in this respect. Private sector involvement through majority or minority ownership is a useful tool to bring in expertise and funding as well as to raise transparency. Successful IPOs in three large energy companies, undertaken during 2013–14, point the way for a greater role for private capital in the future. The transport sector needs to urgently catch up to these developments. In the railway sector, the authorities made significant headway in restructuring the rail freight operator Marfa by downsizing its staff by more than one fourth. However, Marfa’s privatization process has stalled and a further restructuring may be needed. Romania’s rail network needs to be rationalized in line with the recently prepared Transport Master Plan.

36. Romania has taken welcome steps to participate more fully in the European energy market. The authorities removed physical and legal obstacles to gas exports and linked Romania’s electricity grid to those of four neighbors. Moreover, they deregulated the gas and electricity markets for non-residential consumers, which is a major achievement as it accounts for the bulk of energy consumption. This should be followed by restarting the gas tariff deregulation for households, which was interrupted in July 2014, while at the same time strengthening the support for the most vulnerable consumers. The recent decline in global commodity prices and record low inflation in Romania provide a conducive environment for such a deregulation.

37. The authorities are taking steps to reduce youth unemployment and skill mismatches. The Labor Code has introduced more flexibility in employment relations and supported employment growth. The share of fixed-term and temporary contracts has increased, but remains lower than in most EU countries. To reduce the high youth unemployment, the authorities are adopting measures under the National Job Plan and implementing the secondary legislation for the Apprenticeship Law. Regarding the Social Dialogue Law, which covers collective bargaining, the government has started a consultation process on proposed amendments to this legislation. The minimum wage was increased by about 29 percent in 2013–14. While it is still the second lowest in the EU, it has significantly compressed the public sector wage scale and would reach nearly 50 percent of the average wage if the announced increase of 15 percent is implemented in 2016.

Part-Time and Temporary Employment, 2014Q3

(Percent of total)

Sources: Eurostat.

Minimum Wage, 2015(Euro)
Monthly minimum wageMinimum wage in percent of average wage2016 announced minimum wage in percent of average wage
Bulgaria1743937
Romania2384347
Lithuania3004239
Latvia3604643
Hungary3283937
Slovakia3803938
Estonia3913734
Croatia3983737
Poland4144341
Sources: National authorities; and IMF staff estimates. 2015 data include planned minimum wage increases.
Sources: National authorities; and IMF staff estimates. 2015 data include planned minimum wage increases.

Authorities’ views

38. While broadly agreeing with staff’s view on the importance of structural reforms, the authorities argued for more gradual measures. In particular, they stressed that the original road map for the gas tariff deregulation for households was too fast and steep given their fragile incomes after the crisis. Improving the performance of SOEs would require more time to carefully analyze their situation, prepare restructuring plans, and align decisions with the national strategies for energy and transport. The authorities expressed commitment to good SOE governance principles, though the concept was not always fully embraced. Regarding job creation, the authorities agreed with the importance of removing barriers to employment and measures to reduce skill mismatches, especially for the young. They considered broad-based measures to lower the tax wedge further preferable over targeted ones.

Staff Appraisal

39. Romania has in large part reduced internal and external imbalances through impressive fiscal consolidation and prudent monetary and financial sector policies. Growth is becoming more broad-based and sustained amid improved confidence. However, income convergence with the EU has been slow and youth unemployment remains elevated.

40. Reinvigorating structural reforms, including by addressing the large infrastructure gap, is critical for faster growth. Raising growth prospects over the longer term requires continuity of sustainable economic policies, underpinned by stronger fiscal and regulatory institutions, and a more stable and predictable business environment which is crucial for investor confidence. In addition, maintaining adequate reserve buffers and strengthening further public and private sector balance sheets would better position to withstand shocks and respond with mitigating policies if risks materialize. Slippages or failure in implementing these policies and increased volatility in the external environment present key downside risks to the outlook.

41. Fiscal discipline needs to be maintained, underpinned by structural fiscal reforms. The announced tax reduction plans threaten to undermine five years of consolidation gains. Efforts should instead focus on broadening the tax base and reducing the collection gap to help cover medium-term spending pressures. Moreover, stronger public expenditure management and planning as well as better project management are needed to improve spending efficiency and ensure provision of higher quality public infrastructure. Expenditure quality could be improved through an extension and enforcement of the investment prioritization initiative; scaling up of EU funds absorption; and rolling out of the commitment control system to all public institutions. Meanwhile, the private sector participation in the financing of health services should be supported and accelerated to address the projected expansion of age-related spending.

42. Monetary policy should keep the easing bias. Staff sees room for further lowering the policy rate and the MRRs. Further changes to the MRRs should aim to maintain disincentives for foreign-currency lending by keeping differentiated MRRs for domestic-versus foreign currency-denominated liabilities. Staff also recommends strengthening the policy framework by gradually moving to full-fledged inflation targeting as well as the operational framework by implementing recommendations of the recent IMF technical mission.

43. Reinvigorating financial intermediation is important for growth. A continued intense supervision of the banking system should focus on improving its asset quality and resolving NPLs. Making the existing support schemes for SME lending more efficient, facilitating loan restructuring processes, and enabling long-term bank funding would benefit intermediation. Strengthening the non-bank financial sector supervision and providing it with resolution powers for insurance companies is another priority. Any new personal insolvency law should be designed keeping in mind cross-country experiences, and be adopted only after a thorough impact assessment, broad stakeholder consultations, and enhancing the institutional infrastructure.

44. Strong structural reform efforts will be critical to making growth more sustainable and increasing Romania’s growth potential. Efforts should focus on reforming SOE governance practices and legislation; restructuring of SOEs—to improve infrastructure service delivery, strengthen their financial performance, generate resources for investment, and increase private ownership in the SOE sector—as well as on further deregulating energy markets.

45. Boosting medium-term growth prospects also requires continued efforts to encourage higher labor participation. Focus should be on the young, low-skilled and women, among which participation in the formal labor market is far below the EU average. Recommended measures include implementing the new vocational training programs and further lowering the labor tax wedge for low-income earners through targeted measures.

46. It is expected that the next Article IV consultation with Romania will be held in accordance with the Executive Board decision on the consultation cycle for members with Fund arrangements.

Table 1.Romania: Selected Economic and Social Indicators, 2009–15
20092010201120122013

Prelim.
2014

Prelim.
2015

Proj.
Output and prices(Annual percentage change)
Real GDP−7.1−0.81.10.63.42.92.7
Contributions to GDP growth
Domestic demand−14.0−0.71.1−0.5−0.92.83.1
Net exports6.9−0.1−0.11.14.30.1−0.2
Consumer price index (CPI, average)5.66.15.83.34.01.11.0
Consumer price index (CPI, end of period)4.88.03.15.01.60.82.2
Core price index (CPI, end of period)2.34.12.43.3−0.11.21.2
Producer price index (average)2.54.47.15.42.1−0.1
Unemployment rate (average)6.57.07.26.87.16.86.7
Nominal wages8.42.54.95.05.05.25.3
Saving and Investment(In percent of GDP)
Gross domestic investment27.126.827.927.024.523.023.7
Gross national savings22.622.323.222.523.722.522.6
General government finances 1/
Revenue30.631.632.132.431.431.932.0
Expenditure37.837.936.334.833.833.833.9
Fiscal balance−7.1−6.3−4.2−2.5−2.5−1.9−1.8
External financing2.62.82.73.22.11.90.8
Domestic financing4.63.51.5−0.81.41.21.5
Primary balance−5.9−4.9−2.6−0.7−0.8−0.3−0.4
Structural fiscal balance 2/−8.0−6.1−3.4−1.7−1.7−0.6−1.1
Gross public debt (including guarantees) 3/23.330.533.937.538.840.440.5
Money and credit(Annual percentage change)
Broad money (M3)9.06.96.62.78.88.17.5
Credit to private sector0.94.76.61.3−3.3−3.13.5
Interest rates, eop 4/(In percent)
NBR policy rate8.06.256.05.254.02.752.25
NBR lending rate (Lombard)12.010.2510.09.257.05.254.25
Interbank offer rate (1 week)10.73.66.05.91.80.70.6
Balance of payments(In percent of GDP)
Current account balance−4.5−4.6−4.6−4.5−0.8−0.5−1.1
Merchandise trade balance−7.2−7.1−6.7−6.7−3.8−3.7−4.5
Capital account balance0.50.20.51.42.12.62.3
Financial account balance2.1−0.8−1.0−1.7−3.00.10.9
Foreign direct investment balance−2.8−1.8−1.3−1.8−2.0−1.6−1.6
International investment position−62.1−62.3−64.2−67.7−61.7−56.6−52.4
Gross official reserves25.628.327.926.424.623.622.7
Gross external debt67.472.974.074.466.659.954.3
Exchange rates 4/
Lei per euro (end of period)4.24.34.34.44.54.54.4
Lei per euro (average)4.24.24.24.54.44.44.4
Real effective exchange rate
CPI based (percentage change)−7.51.92.9−6.04.71.0
GDP deflator based (percentage change)−8.31.21.8−4.64.1
Memorandum Items:
Nominal GDP (in bn RON)510.5533.9565.1596.7637.6669.5706.6
Potential output growth2.52.01.92.12.32.52.7
Social and Other Indicators
GDP per capita (current EUR, 2013): 7,100; GDP per capita, PPP (current international $, 2013): 18,635
People at risk of poverty or social exclusion: 40.4% (2013)
Sources: Romanian authorities; IMF staff estimates and projections; and World Development Indicators database, Eurostat.

General government finances refer to cash data.

Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

For 2015: Latest available data.

Sources: Romanian authorities; IMF staff estimates and projections; and World Development Indicators database, Eurostat.

General government finances refer to cash data.

Fiscal balance (cash basis) adjusted for the automatic effects of the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

For 2015: Latest available data.

Table 2.Romania: Medium-Term Macroeconomic Framework, Current Policies, 2009–20
20092010201120122013 Prelim.2014 Prelim.2015 Proj.2016 Proj.2017 Proj.2018 Proj.2019 Proj.2020 Proj.
GDP and prices (annual percent change)
Real GDP−7.1−0.81.10.63.42.92.72.93.43.53.53.5
Agriculture 1/−8.89.415.0−27.928.51.5
Non-Agriculture 1/−7.0−1.7−0.23.61.63.0
Real domestic demand−12.3−0.71.1−0.4−0.82.73.13.43.94.14.34.3
Consumption−7.3−0.40.81.10.04.63.03.53.84.24.34.3
Investment−36.6−2.42.90.1−7.9−3.62.93.64.14.24.34.3
Exports−5.315.211.91.016.28.16.46.16.26.16.26.1
Imports−20.712.610.2−1.84.27.76.87.27.27.37.77.6
Consumer price index (CPI, average)5.66.15.83.34.01.11.02.42.52.52.52.5
Consumer price index (CPI, end of period)4.88.03.15.01.60.82.22.22.52.52.52.5
Saving and investment (in percent of GDP)
Gross national saving22.622.323.222.523.722.522.622.422.021.621.224.3
Gross domestic investment27.126.827.927.024.523.023.723.924.024.124.224.3
Government5.17.17.66.45.65.36.66.46.26.05.85.7
Private22.019.720.320.618.917.717.117.617.818.118.418.7
General government (in percent of GDP)
Revenue30.631.632.132.431.431.932.031.531.331.131.030.9
Tax revenue26.726.027.627.827.227.326.726.726.626.626.626.6
Non-tax revenue2.83.73.23.12.72.62.62.62.62.62.62.6
Grants1.01.81.21.41.41.72.72.12.01.91.81.7
Expenditure37.837.936.334.833.833.833.933.232.732.532.332.2
Fiscal balance 2/−7.1−6.3−4.2−2.5−2.5−1.9−1.8−1.7−1.5−1.4−1.3−1.3
Structural fiscal balance 3/−8.0−6.1−3.4−1.7−1.7−0.6−1.1−1.0−1.0−1.0−1.1−1.1
Gross general government debt (direct debt only) 4/21.327.631.835.236.538.038.337.837.236.435.734.9
Gross general government debt (including guarantees) 4/23.330.533.937.538.840.440.540.039.238.337.536.6
Monetary aggregates (annual percent change)
Broad money (M3)9.06.96.62.78.88.17.57.07.57.06.05.0
Credit to private sector0.94.76.61.3−3.3−3.13.55.34.24.75.04.3
Balance of payments (in percent of GDP)
Current account−4.5−4.6−4.6−4.5−0.8−0.5−1.1−1.5−2.0−2.5−3.0−3.6
Trade balance−7.2−7.1−6.7−6.7−3.8−3.7−4.5−4.9−5.3−5.6−5.9−6.3
Services balance0.81.21.21.83.33.93.73.63.63.53.43.3
Income balance−1.3−1.2−1.3−1.7−2.2−1.9−2.1−2.1−2.2−2.2−2.3−2.3
Transfers balance3.22.52.12.01.91.21.71.91.91.81.81.7
Capital account balance0.50.20.51.42.12.62.31.71.61.51.41.4
Financial account balance2.1−0.8−1.0−1.7−3.00.10.9−0.6−1.4−1.4−1.2−2.0
Foreign direct investment, balance−2.8−1.8−1.3−1.8−2.0−1.6−1.6−1.7−1.9−1.9−1.9−1.9
Memorandum items:
Gross international reserves (in billions of euros)30.936.037.335.435.435.536.037.238.939.839.138.3
Gross international reserves (in months of next year’s imports)7.77.77.97.36.96.46.15.95.85.85.85.8
International investment position (in percent of GDP)−62.1−62.3−64.2−67.7−61.7−56.6−52.4−49.6−47.1−45.4−44.3−43.9
External debt (in percent of GDP)67.472.974.074.466.659.954.352.950.748.545.943.6
Short-term external debt (in percent of GDP)12.915.417.115.613.311.810.510.09.48.88.37.8
Terms of trade (merchandise, percent change)1.21.31.8−3.3−1.1−0.6−1.8−0.3−0.10.20.50.0
Nominal GDP (in billions of lei)510.5533.9565.1596.7637.6669.5706.6745.5789.8837.8888.9943.2
Output gap (percent of potential GDP)2.4−0.4−1.3−2.6−1.6−1.2−1.2−1.2−0.9−0.5−0.20.0
Potential GDP (percent change)2.52.01.92.12.32.52.72.93.03.13.23.3
Sources: Romanian authorities; and IMF staff estimates and projections.

Based on gross value added data from the National Institute of Statistics (NIS) in Romania. Note that there is a small discrepancy between the supply side GDP data from the NIS and the demand side data from Eurostat.

Includes in 2011–12, the National Program for Infrastructure Projects (PNDI), which was cancelled thereafter.

Actual fiscal balance adjusted for the automatic effects related to the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

Sources: Romanian authorities; and IMF staff estimates and projections.

Based on gross value added data from the National Institute of Statistics (NIS) in Romania. Note that there is a small discrepancy between the supply side GDP data from the NIS and the demand side data from Eurostat.

Includes in 2011–12, the National Program for Infrastructure Projects (PNDI), which was cancelled thereafter.

Actual fiscal balance adjusted for the automatic effects related to the business cycle and one-off effects.

Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

Table 3.Romania: Balance of Payments, 2009–15(In billions of euros, unless otherwise indicated)
20092010201120122013

Prelim.
2014

Prelim.
2015

Proj.
Current account balance−5.4−5.8−6.2−6.1−1.2−0.7−1.8
Merchandise trade balance−8.6−9.0−9.0−8.9−5.4−5.5−7.1
Exports (f.o.b.)24.132.740.139.943.946.649.2
Imports (f.o.b.)32.741.749.148.849.352.256.3
Services balance1.01.51.72.54.75.95.9
Exports of non-factor services8.57.88.79.913.415.115.9
Imports of non-factor services7.56.37.07.48.79.210.0
Primary income, net−1.6−1.5−1.7−2.3−3.1−2.9−3.3
Receipts1.81.62.02.42.52.52.7
Payments3.43.13.74.75.65.36.0
Secondary income, net3.83.22.82.72.71.82.7
Capital account balance0.60.20.71.93.04.03.6
Financial account balance2.6−1.0−1.3−2.2−4.40.11.4
Foreign direct investment balance−3.4−2.3−1.8−2.4−2.9−2.5−2.6
Portfolio investment balance−0.5−0.9−1.6−3.4−5.5−2.8−1.7
Other investment balance6.42.22.03.54.05.45.7
General government2.0−0.10.40.40.9−0.12.8
Domestic banks4.5−1.00.22.22.54.11.9
Other private sector−0.13.31.50.80.71.40.9
Errors and omissions−1.40.10.71.1−0.2−0.30.0
Multilateral financing2.13.73.51.00.70.31.5
European Commission1.52.21.40.0
World Bank0.30.00.70.00.70.31.5
EIB/EBRD/IFC0.31.51.41.0
Overall balance−6.7−0.80.00.16.83.21.9
Financing6.70.80.0−0.1−6.8−3.2−1.9
Gross international reserves (“-”: increase)−1.1−3.5−0.91.5−2.11.2−0.5
Use of IMF credit, net6.84.30.9−1.6−4.6−4.4−1.4
Purchases 1/6.84.30.90.00.00.00.0
Repurchases0.00.00.0−1.6−4.6−4.4−1.4
Other liabilities, net1.00.00.00.00.00.00.0
Memorandum items:(In percent of GDP)
Current account balance−4.5−4.6−4.6−4.5−0.8−0.5−1.1
Foreign direct investment balance−2.8−1.8−1.3−1.8−2.0−1.6−1.6
Merchandise trade balance−7.2−7.1−6.7−6.7−3.8−3.7−4.5
Exports20.025.830.129.830.431.031.0
Imports27.232.936.836.534.234.635.4
Gross external financing requirement29.726.428.933.531.432.321.6
(Annual percent change)
Terms of trade (merchandise)1.21.31.8−3.3−1.1−0.6−1.8
Export volume−5.315.211.91.016.26.56.4
Import volume−20.712.610.2−1.84.25.06.8
Export prices−6.218.09.5−1.5−5.40.4−0.7
Import prices−15.413.36.81.3−3.11.01.1
(In billions of euros)
Gross international reserves 2/30.936.037.335.435.435.536.0
Excluding IMF credit24.124.725.324.429.535.535.9
Sources: Romanian authorities; and IMF staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010.

Operational definition, reflecting valuation effects and the allocation of SDR 908.8 million that was made available in two tranches in August and September 2009.

Sources: Romanian authorities; and IMF staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010.

Operational definition, reflecting valuation effects and the allocation of SDR 908.8 million that was made available in two tranches in August and September 2009.

Table 4.Romania: Gross External Financing Requirements, 2012–15(In billions of euros, unless otherwise indicated)
2012201320142015
Q1Q2Q3Q4Year
Prelim.Prelim.Proj.Proj.Proj.Proj.Proj.
I. Total financing requirements38.248.545.96.06.05.67.224.9
I.A. Current account deficit0.00.00.00.00.00.00.00.0
I.B. Short-term debt25.822.220.13.42.93.23.513.0
Public sector7.58.67.70.60.60.60.62.5
Banks14.19.07.81.71.61.21.45.9
Corporates4.24.64.61.10.71.31.54.6
I.C. Maturing medium- and long-term debt12.126.524.32.63.12.43.711.9
Public sector2.815.215.81.10.70.30.52.6
Banks4.96.53.90.61.11.21.24.1
Corporates4.44.84.71.01.41.01.95.3
I.D. Other net capital outflows 1/0.3−0.21.40.00.00.00.00.0
II. Total financing sources42.356.349.16.55.78.18.228.6
II.A. Foreign direct investment, net2.23.12.50.60.50.80.72.6
II.B. Capital account inflows1.93.24.01.00.70.71.23.6
II.C. Short-term debt23.322.418.72.92.63.13.411.9
Public sector6.78.17.70.60.60.60.62.5
Banks12.19.06.41.21.41.11.35.1
Corporates4.55.24.61.00.61.31.54.4
II.D. Medium- and long-term debt14.927.524.02.11.93.52.910.4
Public sector6.720.518.01.00.01.70.12.9
Banks5.13.82.30.30.71.01.13.0
Corporates3.13.23.70.81.20.81.74.5
Errors and omissions0.00.00.00.00.00.00.00.0
III. Increase in gross international reserves−1.42.1−1.0−1.1−1.11.71.10.5
IV. Financing gap-0.6-3.9-4.1-1.4-0.3-0.30.6-1.4
V. Program financing-0.6-3.9-4.1-1.4-0.3-0.30.6-1.4
IMF 2/−1.6−4.6−4.4−0.6−0.3−0.3−0.1−1.4
Purchases0.00.00.00.00.00.00.00.0
Repurchases−1.6−4.6−4.4−0.6−0.3−0.3−0.1−1.4
European Commission0.00.00.0−1.50.00.00.0−1.5
Disbursements0.00.00.00.00.00.00.00.0
Principal repayments0.00.00.0−1.50.00.00.0−1.5
Others1.00.70.30.80.00.00.71.5
World Bank0.00.70.30.80.00.00.71.5
EIB/EBRD/IFC1.0
Memorandum items:
Rollover rates for amortizing debt ST (in percent)
Public sector9095100100100100100100
Banks85100827585909586
Corporates10711399909010010096
Rollover rates for amortizing debt MLT (in percent)
Public sector24013411492761728114
Banks10459605565808574
Corporates7167788085859086
Rollover rates for total amortizing debt (in percent)
Public sector131120110955126267107
Banks9083757077859081
Corporates8990898587949491
Gross international reserves 3/35.435.435.536.0
Coverage of gross international reserves
− Months of imports of GFNS (next year)7.36.96.46.1
− Short-term external debt (in percent)93.195.5109.2125.9
Sources: Romanian authorities; and IMF staff estimates and projections.

Includes portfolio equity, financial derivatives and other investments.

SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of January 15, 2015.

Operational definition.

Sources: Romanian authorities; and IMF staff estimates and projections.

Includes portfolio equity, financial derivatives and other investments.

SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of January 15, 2015.

Operational definition.

Table 5a.Romania: General Government Operations, 2009–15 1/(In percent of GDP)
200920102011201220132014

Prelim.
2015

Proj.
Revenue30.631.632.132.431.431.932.0
Taxes26.726.027.627.827.227.326.7
Corporate income tax2.62.12.02.01.92.01.9
Personal income tax3.63.43.43.53.63.53.7
VAT6.77.48.58.58.17.67.9
Excises3.13.23.43.43.33.63.6
Customs duties0.10.10.10.10.10.10.1
Social security contributions9.48.69.08.78.58.67.8
Other taxes1.21.31.21.61.71.81.7
Nontax revenue2.83.73.23.12.72.62.6
Capital revenue0.10.10.10.10.10.20.1
Grants, including EU disbursements1.01.81.21.41.41.72.7
Expenditure37.837.936.334.833.833.833.9
Current expenditure34.034.332.331.731.231.431.3
Compensation of employees9.18.06.86.87.37.56.8
Goods and services5.55.55.65.86.15.95.7
Interest1.21.41.61.81.71.51.5
Subsidies1.41.31.11.00.80.90.8
Transfers16.317.816.816.015.315.416.4
Pensions7.87.98.48.17.77.77.7
Other social transfers4.75.03.63.23.02.92.8
Other transfers 2/3.34.44.34.34.04.25.4
Other spending0.50.50.60.50.50.60.5
Projects with external credits0.40.30.40.30.10.10.1
Capital expenditure 3/4.33.64.13.22.82.62.6
Reserve fund0.00.00.00.00.00.00.0
Net lending and expense refunds−0.5−0.1−0.1−0.1−0.2−0.10.0
Fiscal balance−7.1−6.3−4.2−2.5−2.5−1.9−1.8
Primary balance−6.1−5.0−2.8−0.7−0.8−0.4−0.5
Financing7.16.34.22.52.51.91.8
External borrowing (net)2.62.82.73.22.11.90.8
Domestic borrowing (net)5.73.92.20.91.41.21.5
Use of deposits−1.2−0.4−0.7−1.7−1.0−1.3−0.5
Privatization proceeds0.10.10.00.00.00.00.0
Financial liabilities
Gross general-government debt 4/23.330.533.937.538.840.440.5
Gross general-government debt excl. guarantees21.327.631.835.236.538.038.3
External9.812.715.117.018.019.919.6
Domestic11.514.916.718.218.518.118.7
Memorandum items:
Total capital spending5.17.17.66.45.65.36.6
Fiscal balance (ESA95 basis) 5/−8.8−6.7−5.6−3.0−2.2−1.8−1.5
Structural balance (ESA95 basis) 5/−9.7−6.1−3.9−2.5−1.7−1.3−1.2
Gross general government debt (ESA95 basis) 5/23.230.534.237.338.038.739.1
Output gap 6/7/2.4−0.4−1.3−2.6−1.6−1.2−1.2
Cyclically adjusted balance−8.0−6.1−3.7−1.6−1.9−1.5−1.4
Structural fiscal balance−8.0−6.1−3.4−1.7−1.7−0.6−1.1
Gross general government debt (authorities definition) 8/28.936.439.540.441.944.1
Nominal GDP (in billions of lei)510.5533.9565.1596.7637.6669.5706.6
Sources: Ministry of Public Finance; Eurostat; and IMF staff estimates and projections.

Unless otherwise noted, the table is on a cash basis following GFSM 86. The general government is composed of the central government, local governments, social security funds, and the road fund company.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated general-government debt, including state government debt, local government debt, and guarantees. Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

European Commission estimate.

Percentage deviation of actual from potential GDP.

Recalculation of potential GDP growth and output gap since program approval resulted in a narrowing of the output gap in 2013 and prior years.

Includes guarantees and intra-governmental debt.

Sources: Ministry of Public Finance; Eurostat; and IMF staff estimates and projections.

Unless otherwise noted, the table is on a cash basis following GFSM 86. The general government is composed of the central government, local governments, social security funds, and the road fund company.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated general-government debt, including state government debt, local government debt, and guarantees. Increase in ratio in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

European Commission estimate.

Percentage deviation of actual from potential GDP.

Recalculation of potential GDP growth and output gap since program approval resulted in a narrowing of the output gap in 2013 and prior years.

Includes guarantees and intra-governmental debt.

Table 5b.Romania: General Government Operations, 2009–15(In millions of lei)
200920102011201220132014

Prelim.
2015

Proj.
Revenue156,373168,635181,567193,148200,038213,834226,360
Taxes136,350138,667155,710165,702173,489182,586188,703
Corporate income tax13,46610,96911,03011,82612,19113,68413,707
Personal income tax18,55117,95719,46120,95622,73623,69225,863
VAT34,32239,24647,91750,51651,82750,87955,536
Excises15,64617,31219,10520,26021,10624,09525,531
Customs duties656574674707620643675
Social security contributions47,82945,70450,63751,65854,37957,61255,311
Other taxes5,8796,9056,8859,77810,63011,98212,080
Nontax revenue14,48719,79618,21718,32817,15317,18818,029
Interest Revenue8645957182791821571,064
Capital revenue5466857666536501,073854
Grants5,0579,4946,8748,4229,11211,18918,775
o/w EU pre-accession funds2,9594,05476544320115176
Financial operations and other−67−6043−3651,7980
Expenditure192,782202,256205,277207,921215,810226,327239,364
Current expenditure173,445183,243182,709189,274198,957210,136220,937
Compensation of employees46,67642,83938,49640,79946,29950,24748,374
Goods and services28,02829,54131,64334,44438,58039,58240,037
Interest6,0637,2758,88310,71010,74910,19910,529
Subsidies7,2156,7356,4076,1225,1506,0945,489
Transfers83,40795,06095,17295,58597,310103,422115,711
Pensions39,85142,10747,46948,05149,37451,53954,228
Other social transfers24,10126,50520,53918,99719,00519,66319,867
Other transfers 1/16,93123,51424,04925,56925,71227,94238,197
Other spending2,5232,9333,1152,9683,2194,2783,420
Projects with external credits2,0561,7942,1081,614869592796
Capital expenditure 2/21,82819,44123,05619,30517,85517,14018,427
Reserve fund0000000
Net lending and expense refunds−2,490−428−488−657−1,002−9490
Fiscal balance−36,409−33,621−23,710−14,774−15,772−12,493−13,005
Primary balance−31,210−26,941−15,545−4,343−5,206−2,451−3,539
Financing36,40933,62123,71014,77415,77212,49313,005
External borrowing (net)13,14414,80715,25019,27113,35112,5915,406
Domestic borrowing (net)29,12920,84112,3775,3058,9728,19410,749
Use of deposits−6,129−2,161−3,827−9,916−6,630−8,745−3,200
Privatization proceeds2912890525050
Discrepancy−26−155−91109544530
Financial liabilities
Gross general-government debt 3/4/119,195163,022191,423224,040247,499270,338286,493
Gross general-government debt excl. guarantees 4/108,528147,261179,639210,254232,766254,472270,627
External49,99367,71785,382101,476114,997133,248138,654
Domestic58,53579,54494,257108,778117,769121,224131,973
Memorandum item:
Gross general government debt (authorities definition)5/147,329194,459223,268240,843267,151295,579
Sources: Ministry of Public Finance; Eurostat; and IMF staff estimates and projections.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated general-government debt, including state government debt, local government debt, and guarantees.

Part of increase in debt in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

Includes guarantees and intra-governmental debt.

Sources: Ministry of Public Finance; Eurostat; and IMF staff estimates and projections.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated general-government debt, including state government debt, local government debt, and guarantees.

Part of increase in debt in 2015 relative to 2014 reflects projected debt financing of an increase in Treasury deposits of 0.5 percent of GDP.

Includes guarantees and intra-governmental debt.

Table 5c.Romania: Consolidated General Government Balance Sheet, 2010–13(In millions of lei, unless otherwise indicated)
2010201120122013
Opening balanceTransactionsOther economic flows 1/Closing/

Opening

balance 2/
TransactionsOther economic flows 1/Closing/

Opening balance 2/
TransactionsOther economic flows 1/Closing/

Opening balance 2/
TransactionsOther economic flows 1/Closing balance
Net worth and its changes:592,558(42,752)(38,202)511,604(20,003)(15,005)476,596(2,282)3,092477,4051,6004,271483,276
Nonfinancial assets578,265(7,744)….570,52112,038….582,55915,335….597,89316,402….614,296
Fixed assets564,592(7,852)….556,73911,930….568,66914,903….583,57316,226….599,799
Buildings and structures….9,011….….8,849….….22,588….….25,964….….
Machinery and equipment….1,180….….1,823….….1,466….….1,219….….
Other fixed assets….(18,043)….….1,257….….(9,150)….….(10,958)….….
Inventories13,673109….13,782108….13,889431….14,321176….14,497
Valuables….….….….….….….….….….….….
Nonproduced assets….….….….….….….….….….….….….
Financial assets177,755411(36,441)141,7248,886(15,987)134,62313,6894,229152,5412,746(285)155,002
by instrument
Monetary gold and SDRs
Currency and deposits21,151(2,329)1,02819,8505,717(5,910)19,65810,59541130,6645,87048337,017
Securities other than shares
Loans6,271513(439)6,345258306,633115(81)6,66680(344)6,403
Shares and other equity111,369580(38,425)73,524897(11,183)63,238(408)2,44565,275(2,044)(74)63,157
Insurance technical reserves
Financial derivatives
Other accounts receivable38,9641,6471,39442,0052,0131,07745,0953,3871,45449,936(1,160)(350)48,426
by debtor
Domestic….(1,204)….….8,935….….11,621….….2,557….….
Foreign….1,614….….(49)….….2,068….….213….….
Liabilities163,46135,4191,761200,64240,926(982)240,58731,3061,138273,03017,548(4,556)286,022
by instrument
Special Drawing Rights (SDRs)
Currency and deposits2,3582,390(70)4,6771,72006,398(1,410)04,987(765)4,222
Securities other than shares62,88221,42742284,73122,7423,117110,58931,0133,563145,16522,745(5,985)161,925
Loans56,68016,0061,07773,7637,02973481,526(2,573)2,87681,829(2,064)1,21680,980
Shares and other equity5,6541,0411,2347,9301,618(3,964)5,5833(5,584)2(2)
Insurance technical reserves
Financial derivatives2,282(1,105)1,177(1,108)69(69)
Other accounts payable33,606(4,340)(901)28,3657,81823936,4214,27435241,047(2,368)21538,894
by debtor
Domestic82,46017,868889101,21621,418(1,267)121,36712,5193,848137,73319,979157,712
Foreign81,00117,55287399,42619,509285119,22018,787(2,710)135,297(2,396)132,901
Memorandum items
Net financial worth14,294(35,009)(38,202)(58,918)(32,041)(15,005)(105,963)(17,617)3,092(120,489)(32,041)21,510(131,020)
Maastricht debt 3/118,49135,5525,574159,51130,9012,682193,14417,42312,170222,794….….242,194
Obligations for social security benefits 4/….….….….….….….….….(143,805)….….….
Memorandum:
Nominal GDP (Lei - billions)533.9565.1596.7636.6
Sources: Romanian authorities; Eurostat; and IMF staff calculations.

Calculated as a residual. Reflects holding gains and losses and other changes in the volume of assets and liabilities.

Closing balance in precedeing year is opening balance in current year.

Transaction column data represents government net lending (-)/net borrowing (+) in ESA terms.

Unfunded pension liabilities only.

Sources: Romanian authorities; Eurostat; and IMF staff calculations.

Calculated as a residual. Reflects holding gains and losses and other changes in the volume of assets and liabilities.

Closing balance in precedeing year is opening balance in current year.

Transaction column data represents government net lending (-)/net borrowing (+) in ESA terms.

Unfunded pension liabilities only.

Table 6.Romania: Monetary Survey, 2010–15(In millions of lei, unless otherwise indicated; end of period)
201020112012201320142015
Prelim.Proj.
I. Banking System
Net foreign assets19,08615,74030,20360,61394,332110,612
In millions of euros4,4543,6446,82013,51621,04624,857
o/w commercial banks−21,086−21,846−18,594−15,963−11,767−9,837
Net domestic assets183,687200,468191,815180,937166,715170,013
General government credit, net43,14052,59649,59944,76939,09139,965
Private sector credit209,294223,037225,836218,465211,652218,405
Other−68,747−75,165−83,620−82,297−84,028−88,357
Broad Money (M3)202,773216,208222,018241,550261,047280,625
Money market instruments3,2014,149188296258278
Intermediate money (M2)199,572212,059221,830241,254260,788280,347
Narrow money (M1)81,59285,83489,020100,314118,219116,811
Currency in circulation26,79330,61031,47734,78639,90645,465
Overnight deposits54,79955,22457,54365,52878,31371,346
II. National Bank of Romania
Net foreign assets109,433110,106112,552132,202147,071154,388
In millions of euros25,54025,48925,41429,47932,81334,694
Net domestic assets-54,330-48,541-55,244-63,537-78,719-76,513
General government credit, net−12,795−13,564−24,973−31,204−41,757−36,757
Credit to banks, net−26,148−19,529−14,443−23,266−24,064−25,868
Other−15,387−15,448−15,828−9,067−12,898−13,888
Reserve money55,10361,56557,30868,66668,35277,874
(Annual percent change)
Broad money (M3)6.96.62.78.88.17.5
NFA contribution0.7−1.76.713.714.06.2
NDA contribution6.28.3−4.0−4.9−5.91.3
Reserve money6.711.7−6.919.8−0.513.9
NFA contribution16.31.24.034.321.710.7
NDA contribution−9.610.5−10.9−14.5−22.13.2
Domestic credit, real3.25.9−4.8−5.9−5.51.1
Private sector, real−3.03.3−3.5−4.8−3.91.3
Public sector, real49.418.2−10.2−11.1−13.40.1
Broad money (M3), in real terms−1.03.4−2.27.16.95.2
Private credit, nominal4.76.61.3−3.3−3.13.5
Memorandum items:
CPI inflation, eop8.03.15.01.60.82.2
NBR inflation target band2.5 - 4.52.0 - 4.02.0 - 4.01.5 - 3.51.5 - 3.51.5 - 3.5
Interest rates (percent) 2/
Policy interest rate6.256.05.254.002.752.25
Interbank offer rate, 1 week3.66.05.91.80.7
Corporate loans 1/9.49.79.86.85.5
Household time deposits 1/7.66.65.63.92.8
Share of foreign currency private deposits 2/36.133.636.734.534.0
Share of foreign currency private loans 2/63.063.462.560.956.2
M2 velocity2.682.662.692.652.662.53
Money multiplier (M3/reserve money)3.683.513.873.523.823.60
NIR (in billion Euro, at program exchange rates)16.323.728.3
Sources: National Bank of Romania; and IMF staff estimates and projections.

Rates for new local currency denominated transactions.

For interest rates and shares of foreign currency loans and deposits, latest available data.

Sources: National Bank of Romania; and IMF staff estimates and projections.

Rates for new local currency denominated transactions.

For interest rates and shares of foreign currency loans and deposits, latest available data.

Table 7.Romania: Financial Soundness Indicators, 2008–14(In percent)
2008200920102011201220132014
Dec.Dec.Dec.Dec.Dec.Dec.Dec.

Prelim.
Core indicators
Capital adequacy
Capital to risk-weighted assets13.814.715.014.914.915.517.3
Tier 1 capital to risk-weighted assets (1/)11.813.414.214.313.814.114.3
Asset quality
Nonperforming loans (2/) to total gross loans2.77.911.914.318.221.913.9
IFRS Provisions for NPLs / NPLs61.067.969.8
Earnings and profitability
Return on assets1.60.2−0.2−0.2−0.60.0−1.2
Return on equity(3/)17.02.9−1.7−2.6−5.90.1−11.6
Net interest income to operating income44.844.160.662.062.358.858.3
Noninterest expense to operating income (cost to income)55.763.964.967.858.756.555.4
Personnel expense to operating income23.420.321.021.926.025.424.9
Liquidity
Liquid assets (4/)to total assets47.157.460.058.757.656.257.4
Liquid assets (4/) to short-term liabilities (5/)230.5132.0142.2151.8147.7156.3159.2
Liquid assets (4/) to total attracted and borrowed sources116.279.480.975.876.473.474.1
Foreign exchange risk
Net open position in foreign exchange, in percent of capital1.62.3−1.4−4.7−1.82.5−2.0
Lending in foreign exchange, in percent of non-gov. credit57.860.163.063.462.560.956.2
Foreign currency liabilities, in percent of total attracted and borrowed sources43.742.843.544.846.345.142.9
Deposits in foreign exchange, in percent of non-gov. dom. deposits34.838.836.033.536.434.133.2
Encouraged indicators
Deposit-taking institutions
Leverage ratio (6/)8.17.68.18.18.08.07.3
Personnel expenses to noninterest expenses41.931.832.332.344.344.945.0
Customer deposits to total (non-interbank) loans81.988.784.884.087.398.7109.5
Loan to Deposit (LTD) Ratio122.0112.8117.9119.1114.5101.391.3
Structural indicators (December 2014):
Number of banks: 40; Number of foreign-owned subsidiaries/branches: 25/9; Share of deposits/loans of 5 largest banks: 54.3 percent/52.9 percent
Source: National Bank of Romania.

For 2008–2011, market and operational risk are not used in compiling risk weighted assets.

The NPLs represent un-adjusted exposures of loans and related interests overdue for more than 90 days and/or for which legal proceedings were initiated.

Return on equity is calculated as net profit/loss to average own capital.

Liquid assets = balance sheet assets and off balance sheets items with residual maturity of up to 3 months.

Short term liabilities = balance sheet liabilities and off balance sheet items with residual maturity of up to 3 months.

Tier 1 capital to average assets.

Source: National Bank of Romania.

For 2008–2011, market and operational risk are not used in compiling risk weighted assets.

The NPLs represent un-adjusted exposures of loans and related interests overdue for more than 90 days and/or for which legal proceedings were initiated.

Return on equity is calculated as net profit/loss to average own capital.

Liquid assets = balance sheet assets and off balance sheets items with residual maturity of up to 3 months.

Short term liabilities = balance sheet liabilities and off balance sheet items with residual maturity of up to 3 months.

Tier 1 capital to average assets.

Annex I. Implementation of the 2012 Article IV Key Recommendations
Key recommendtionsPolicy actions
Strengthen fiscal discipline
Exit EU Excessive Debt Procedure (EDP)Exited EDP in 2013 after reducing the headline deficit 3 percentage points of GDP in 2012 in ESA terms.
Establish framework to anchor fiscal policiesEstablished a structural deficit target rule; transposed EU fiscal compact into national legislation.
Manage fiscal impact of ageing populationImplemented a basic health care package; proposed increase in retirement age for woman to 65.
Increase EU funds absorptionRaised EU-funds absorption sevenfold to 52 percent as of December 2014.
Limit financial sector vulnerability
Maintain exchange rate flexibilityReduced FX interventions, though the exchange rate has continued to play an important role in monetary policy.
Continue intensive bank supervisionUndertook several collateral audits, on-site visits, and stress tests of banks and required capital injections where necessary.
Mitigate rise in nonperforming loans (NPL)Implemented an NPL reduction plan from mid-2014, including facilitating the sale and writeoff of fully provisioned NPLs.
Accelerate EU convergence through structural reforms
Modernize key network sectorsImplemented energy market deregulation through end-2014; however, gas tariff deregulation for residential consumers was postponed.
Privatize public enterprisesHeld initial or secondary public offerings in four energy companies and liquidated two others.
Improve corporate governance of SOEsFailed to fully introduce professional managers in SOEs, particularly in the transportation sector
Address labor market inefficienciesPromulgated Apprenticeship Law to expand vocational training.
Annex II. Romania Risk Assessment Matrix (RAM)
RiskRelative Likelihood and Transmission ChannelsExpected Impact if Risk is RealizedPolicy Response
1. Surge in global financial market volatilityHigh

• Investors may sell Romanian financial assets after reassessing risks in light of rise in volatility.
Medium

• Increase in borrowing costs which could depress GDP growth.

• Risk of overshooting with implications for ability to service FX loans (57 percent of total bank loans).
• Allow for exchange rate flexibility while offsetting excessive market volatility.

• Utilize some of fiscal financing buffer until markets settle down.
2. Shortfall in accelerating EU funds absorptionHigh

• Weak capacity and complex bureaucracy continue to hamper EU funds absorption.
Medium

• Delay in much-needed infrastructure upgrade would lower actual and potential economic growth.

• Weaker quality of public outlays as budgeted co-financing could be redirected to current spending.
• Redouble efforts to improve EU project implementation capacity.

• Strictly adhere to national procurement rules to reduce regulatory arbitrage between spending on EU-funded projects and other items.
3. Protracted period of slower growth or low inflation in the euro areaHigh

• Exports could fall. In the short run, the substitution effect mitigates against this risk (i.e., shift in euro area demand toward cheaper products produced in Romania).

• FDI could drop as investors reassess future euro area demand for Romanian exports.

• Import low inflation from euro zone, reducing inflation expectations.
Medium

• Lower actual and potential growth.

• Potential widening of the current account deficit, possibly offset in part through substitution effect of shift in EU demand toward lower cost products.
• Allow automatic stabilizers to work.

• Accelerate absorption of EU fund s.

• Allow for exchange rate flexibility while offsetting excessive market volatility.
4. Foreign banks rebalance portfolio exposure.Medium

• Foreign parent banks accelerate ongoing deleveraging of remaining stock of funding (stock estimated at EUR 11.6 billion).

• Reduction in credit supply.
High/Medium

• Exchange rate pressure and possible deterioration in bank balance sheets given that FX loans comprise 57 percent of bank loans.

• Other commercial banks may seek to grow market share, offsetting potential reduction in credit.


• Reduce minimum reserve requirements.

• Engage host country supervisors to develop a coordinated response to deleveraging.

• Intensify liquidity monitoring.

• Stand ready to provide liquidity support.
5. Sustained tensions surrounding Russia/UkraineMedium

• Lower investor risk appetite for emerging Europe assets.

• Disruption of normal trade relations through sanctions.

• Interruption of Russian gas supply.
Low

• Increase in borrowing costs, but conversely potential for safe haven inflows in emerging Europe.

• Modest direct financial and trade linkages limit potential impact.

• Possible rationing of gas for some industrial users during winter months, though stored gas is likely sufficient to cover a large portion of domestic demand.
• Communicate clearly limited economic and financial links with Russia/Ukraine.

• Ease monetary policy in case low inflation becomes entrenched.

The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks is staff’s subjective assessment of risks surrounding the baseline. Non-mutually exclusive risks may interact and materialize jointly.

The RAM shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks is staff’s subjective assessment of risks surrounding the baseline. Non-mutually exclusive risks may interact and materialize jointly.

Annex III. Public and External Debt Sustainability Analysis

Romania’s public debt is sustainable. The main vulnerability is a projected gross financing need of 8.2 percent of GDP in 2015. The main risks arise from underperformance of GDP growth and a banking sector contingent liability, which could push the public debt ratio to nearly 50 percent of GDP in 2017 in the DSA scenario. Exchange rate volatility and exposure to international capital outflows are also risks. Risks from contingent liabilities are contained, however, since all outstanding guarantees are already included in public debt and banks are well capitalized with limited exposure to short-term external debt. External vulnerabilities persist due to relatively high external debt and rollover needs, but the projected current account deficits are sustainable.

The macroeconomic and fiscal assumptions underpinning the DSA are those of the medium-term baseline scenario. The output gap is expected to close by 2020 and real GDP growth to reach 3½ percent, more than 3 percentage points below the pre-crisis boom period average. Analysis of real GDP forecasts errors indicates that the size of the output slump during the crisis and the slow recovery were underestimated, an experience shared with many crisis countries. Growth projections proved optimistic in part because domestic demand growth was lower than anticipated. However, should the pace of structural reforms and EU funds absorption accelerate substantially, staff sees upside potential for medium-term growth. Fiscal policy assumes that the authorities reach a cash deficit target of 1.8 percent of GDP in 2015 (-1.45 percent of GDP in ESA terms), consistent with the medium-term budgetary objective. This path is in line with the new fiscal rules under the Fiscal Compact. In addition, the projected primary balances are greater than the debt-stabilizing balance. Considering the risks of adjustment fatigue, a zero primary balance rather than a small surplus is included as a possible scenario in assessing the distribution of debt dynamics in the fan chart.

Public debt is low but relatively high gross financing needs are a vulnerability. Public debt, including guarantees, is projected to peak in 2015 at 40.4 percent of GDP, due in part to a projected financing of an increase in Treasury deposits of 0.5 percent of GDP. Without the projected increase, the public debt-to-GDP ratio would have reached its peak in 2014 at 40.2 percent of GDP. Gross financing needs are projected to continue declining from 9 percent of GDP in 2014 to below 6 percent of GDP by 2020. To manage some of the financing risk, the authorities maintain a foreign-currency financing buffer (excluding privatization proceeds), which was four months of gross financing needs in January 2015, though the authorities have signaled a desire to reduce the buffer gradually to three months, depending on market conditions. Most of longer-term debt is official financing (about 28 percent of total public debt) while the average maturity of government securities issued on the domestic market is about 3 years. The authorities have been addressing rollover risks under their debt management strategy with a view to issuing longer-term securities as well as lengthening the yield curve. With foreign currency-denominated debt accounting for about 60 percent of public debt, public debt is also exposed to exchange rate risk. Moreover, due to strong portfolio investment by non-residents over the past 12 months their share in domestic debt securities holdings is about 20 percent, raising the exposure to shifts in international capital flows.

Overall, public debt is sustainable. The stress test scenarios indicate that the main risk arises from weaker GDP growth, which could push the debt ratio to nearly 50 percent of GDP but still below the 60 percent threshold under the Stability and Growth Pact. The scenario assumes that real output growth rates in 2015–16 are lower by one standard deviation, which leads to worsening of the fiscal position and debt levels. In the baseline scenario, continued fiscal adjustment would ensure debt sustainability. Barring unexpected events, potential contingent liabilities of the government would also be limited. SOE debt is estimated at around 7 percent of GDP (including SOEs under insolvency procedures or in liquidation). A banking sector contingent liability shock involving a one-time bailout that increases non-interest expenditure by 10 percent of banking sector assets would increase debt to 45.4 percent of GDP in 2015, which would also be the peak under this shock. Despite remaining vulnerabilities of the banking system, including due to a large share of foreign currency denominated loans and high rollover needs, downside risks are contained as banks are generally well capitalized and their short-term external liabilities are below 4 percent of GDP.

The external debt sustainability analysis indicates that the projected current account deficits remain sustainable. Gross external debt was about 66 percent of GDP at end-2013, around one-third of which was public debt. Almost one-fifth of external debt is at short-term maturities, mainly of the non-bank private sector. The short-term financing risk for non-bank private sector is expected to be limited, as around half of the short-term debt is intra-company loans with relatively low rollover risks. The projected medium-term current account deficit of 3.6 percent of GDP is in line with a declining external debt-to-GDP ratio. Bound tests indicate that 30 percent depreciation would substantially increase the external debt-to-GDP ratio over the medium term, while other standard shocks would only lead to a slower decline in the external debt-to-GDP ratio.

Romania Public DSA Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white.

Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ EMBIG, an average over the last 3 months, 27-Nov-14 through 25-Feb-15.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Romania Public DSA – Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes program countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Romania.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis.

Romania Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario(in percent of GDP unless otherwise indicated)
Source: IMF staff.

Public sector is defined as general government and includes public guarantees, defined as.

Based on available data.

EMBIG.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as æ(1+r).

Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Source: IMF staff.

Public sector is defined as general government and includes public guarantees, defined as.

Based on available data.

EMBIG.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r - π(1+g) - g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 5 as æ(1+r).

Includes changes in the stock of guarantees, asset changes, and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Romania Public DSA – Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Romania Public DSA – Stress Tests

Source: IMF staff.

Romania: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2013.

Romania: External Debt Sustainability Framework, 2010–20(In percent of GDP, unless otherwise indicated)
ActualEst.Projections
20102011201220132014201520162017201820192020Debt-stabilizing non-interest current account 6/
Baseline: External debt72.974.074.466.659.954.352.950.748.545.943.6-2.8
Change in external debt5.51.10.4−7.9−6.7−5.6−1.3−2.2−2.2−2.5−2.3
Identified external debt-creating flows (4+8+9)−0.7−0.32.3−6.5−3.9−2.0−1.6−1.5−1.0−0.40.3
Current account deficit, excluding interest payments2.21.92.1−1.7−2.0−1.0−0.50.10.61.21.9
Deficit in balance of goods and services5.95.54.80.5−0.20.71.31.72.12.53.0
Exports32.036.637.239.740.941.041.040.940.940.740.2
Imports37.942.142.040.240.741.742.342.642.943.243.2
Net non-debt creating capital inflows (negative)−1.9−1.4−1.9−1.9−1.5−1.5−1.7−1.8−1.8−1.8−1.8
Automatic debt dynamics 1/−1.0−0.82.1−2.8−0.40.60.50.30.20.20.2
Contribution from nominal interest rate2.42.72.52.52.42.12.01.91.91.81.7
Contribution from real GDP growth0.5−0.7−0.5−2.3−1.8−1.5−1.5−1.7−1.7−1.6−1.5
Contribution from price and exchange rate changes 2/−3.9−2.80.1−3.0−1.0
Residual, incl. change in gross foreign assets (2-3) 3/6.21.5−1.9−1.4−2.8−3.60.3−0.8−1.3−2.1−2.6
External debt-to-exports ratio (in percent)227.9202.3200.3167.6146.2132.5129.1124.0118.7112.8108.6
Gross external financing need (in billions of Euros) 4/33.538.544.945.348.634.331.231.734.535.536.2
in percent of GDP26.428.933.531.432.321.618.617.818.317.717.0
Scenario with key variables at their historical averages 5/54.353.451.649.346.343.1-6.0
10-Year10-Year
HistoricalStandard
Key Macroeconomic Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)−0.81.10.63.42.92.84.72.72.93.43.53.53.5
GDP deflator in Euros (change in percent)6.14.0−0.24.21.57.010.12.72.62.62.62.62.6
Nominal external interest rate (in percent)3.73.93.33.73.84.40.93.73.93.93.93.93.9
Growth of exports (Euro terms, in percent)24.620.32.015.17.615.313.65.65.65.86.05.94.8
Growth of imports (Euro terms, in percent)19.416.80.23.25.713.019.48.17.16.97.06.96.2
Current account balance, excluding interest payments−2.2−1.9−2.11.72.0−4.14.71.00.5−0.1−0.6−1.2−1.9
Net non-debt creating capital inflows1.91.41.91.91.53.92.71.51.71.81.81.81.8

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in Euro terms, g = real GDP growth rate, e = nominal appreciation (increase in Euro value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; Euro deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, Euro deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in Euro terms, g = real GDP growth rate, e = nominal appreciation (increase in Euro value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; Euro deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, Euro deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Food items comprise about 50 percent of the core index.

Under the EC/IMF-supported program, the cash and ESA-budget deficits would be narrowed by the amount of the adjuster in case EU-funds absorption underperforms.

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