22.
ROMANIA
Economy not out of the woods yet
programme. Investment spending has been hard hit
Domestic demand prolongs the recession
by the political uncertainty and the still high risk
After a major slump in economic growth in 2009 premia associated with the country and the region.
(-7.1%), the Romanian economy remains mired by This is likely to have an impact on the rate of
weak domestic demand in 2010. The long duration potential growth of the economy in the short-term
of the recessionary period is mainly due to the as its productive capacity has been reduced and
unsustainable developments in the economy before will take some time to recover. On the other hand,
the international crisis. The economic boom in the industrial activity is benefitting strongly from the
pre-crisis period – with real GDP growth recovery in the main trading partners, and seems to
averaging 6.8% in 2004-08 – was underpinned by be sheltered from the weak domestic environment.
strong domestic demand. The latter was fuelled by Exports increased robustly in the first half of this
a pro-cyclical policy of generous increases in year, with imports rising in tandem but at a slower
public wages and pensions, and also by bank rate. The current-account deficit is projected to
lending, most of which in foreign currency. As deteriorate somewhat this year to 5.5% of nominal
a result, Romania entered the recession with GDP, from 4.5% in 2009, primarily due to lower
a budget deficit of 5.4% of GDP and workers' remittances. Still, this ratio represents
a current-account deficit of 12.7%. This vulnerable a substantial improvement from the double-digit
position created additional stress in local financial rates recorded in 2006-08.
markets and limited the scope for any government
stimulus to prop up the economy. Graph II.22.1: Romania - GDP growth and contributions
20 pps.
With the onset of the crisis, Romania asked for 15
forecast
medium-term financial assistance in the form of a 10
multilateral loan package totalling EUR 20 bn 5
from the EU, the IMF, the World Bank, the EIB
0
and the EBRD. This assistance is still ongoing and
-5
loan disbursements are conditional on
implementing an adjustment programme which -10
aims to bring down the budget deficit, promote -15
structural reforms and restore stability in financial -20
markets. The key economic reforms include a new 05 06 07 08 09 10 11 12
pension system, a unified wage law for the Domestic demand
Net exports
employees in the budgetary sector and a fiscal GDP growth (y-o-y%)
responsibility law to ensuring the long-term
The economy is expected to turn around in 2011,
sustainability of public finances. Thanks to the
with real GDP forecasted to increase by 1.5%.
programme, pressures on the exchange rate have
After falling severely in 2009 and 2010,
been reduced, financial stress has eased, and the
investment should pick up vigorously by 4.2% and
international reserves position has improved.
is expected to be a main driver of growth as
companies re-adjust their production lines to meet
Industrial activity decoupled from weak the increased external demand. Exports have
domestic environment maintained their strong momentum throughout
2010, and together with the jump in industrial
Real GDP growth is expected to decline by 1.9%
orders, this development is expected to re-assure
in 2010, mainly due to faltering domestic demand.
companies even if risk spreads remain somewhat
Private consumption recovered somewhat in the
elevated. Moreover, increased absorption of
second quarter, but fell again after the increase in
substantial EU funds would provide a fillip for
the standard VAT rate, cuts in public wages and
infrastructure investment. After having declined
layoffs in the budgetary sector. Retail sales
considerably in 2009 (-10.6%) and 2010 (projected
plummeted and consumer sentiment stands at
to decline by 1.6%), household consumption will
historically low levels. Government spending is
pick-up marginally next year by 1.8%, as wages
also falling in order to keep in line with the targets
re-adjust upwards. It will however be suppressed
agreed in the context of the multilateral assistance
131
European Economic Forecast, Autumn 2010
by the continuing fiscal retrenchment and the high … while inflation increased on the back of the
debt-service-to-income ratio, which is also leading VAT increase
to high non-performing loans (ratio close to 12%
The purchasing power of households has been hit
as at September). After having an overall positive
not just by the reduction in gross wages, but also
impact in 2009 and 2010, net exports are expected
by the elevated levels of inflation. The declining
to have a negative contribution to growth next year
trend in inflation since mid-2008 was halted by the
as imported capital goods increase, feeding into
5pps increase in the main VAT rate in July. VAT
investment growth. As Romanians living abroad
and higher food prices will push CPI inflation
benefit from improving labour market conditions
towards 8% by year-end, compared to 4.6% last
abroad, workers' remittances should pick-up again
year. In view of these inflationary pressures, the
in 2011. The current-account deficit is projected to
National Bank of Romania maintained its policy
stabilise at 5.6% of GDP.
rate at 6.25% since May 2010. Annual inflation is
projected to be within the central bank's targeted
The economy is then expected to close the output
tolerance band of 3% +/-1 pp. in end-2011 and
gap faster in 2012 as it grows by 3.8%, above its
throughout 2012.
medium-term potential growth rate of around 3%.
By then, wages are projected to accelerate from
their very low levels (compared to its main trading Fiscal consolidation to continue, but substantial
partners), especially in the industrial and risks of reversing measures remain
professional sectors. This development will in turn
The fiscal situation deteriorated further in the first
have a positive impact on restoring household
months of 2010, due mostly to substantial revenue
balance sheets and will lead to a higher growth rate
underperformance. During the multilateral
in private consumption. Growth will thus be more
financial assistance review in May 2010 it
broad-based, with domestic demand again playing
appeared that the 2010 deficit target of 6.4% of
a decisive role in uplifting the economy.
GDP would be missed by around 3 pps. of GDP
Government consumption will however remain
under unchanged policies. The 2010 government
subdued as the government is expected to continue
deficit target was revised upward to 7.3% of GDP
with fiscal consolidation.
to accommodate for a deterioration in economic
conditions. To reach the revised target, the
Higher unemployment and declining wages … authorities took additional consolidation measures
including a temporary 25% reduction in public
The protracted economic recession led to higher
wages, a 15% reduction in social spending
unemployment in 2010 and a substantial correction
excluding pensions and an increase in the main
in wage growth. The unemployment rate has been
VAT rate from 19% to 24%. In addition, the
declining somewhat since the second quarter, but
authorities decided to cut spending on goods and
most of this could be statistical as those who lose
services by 10% and early retirements were frozen
their unemployment benefit do not seem to have an
from 1 June 2010 until after the pension reform is
incentive to register for work. The unemployment
in effect (1 January 2011). Social contributions and
rate is projected to average 7.4% in 2010, up from
personal income tax bases were broadened and the
6.8% last year, and then to diminish slowly in
authorities also committed to further reduce
2011-12. The recovery in total employment will be
personnel in the last part of the year, on top of cuts
delayed – employment growth is expected to be
in the first half of 2010 exceeding 25000 jobs. The
negligible in 2011, after negative growth this year
fiscal consolidation measures have put Romania on
– due to the lack of flexibility in the labour market
track to achieve the deficit target of 7.3% of GDP
and also because of further layoffs in the public
for 2010. However, Romania continues to be
sector. Improving labour market legislation
plagued by recurring arrears, particularly in the
remains a key challenge as the country grapples
health sector. Despite the fact that 2 billion RON
with its huge informal economy, low employment
were given to the sector to pay back arrears in
and activity rates, and strong emigration. In the
September, trends would suggest a new build-up of
meantime, growth in average gross monthly
arrears at the end of the year due to structural
earnings went into negative territory in the third
problems (the health fund can make expenditure
quarter after the 25% cut in public wages, but are
commitments exceeding its budget which
expected to increase as from next year as layoffs
translates into arrears). The authorities have
will leave some space for upward wage adjustment
reallocated funds within the budget to pay the new
in the public sector.
accumulated arrears and would use any budget
132
Member States, Romania
over performance to this effect. They have also in revenue and expenditure controls. For 2012,
agreed to measures within the multilateral financial under the no-policy-change assumption, the budget
assistance programme to prevent a further deficit is forecast to decrease to 3.5% of GDP.
accumulation of arrears in the health sector in the
future. While the forecast assumes that the authorities do
not reverse the fiscal consolidation measures taken
The 2011 budget deficit is forecast to decrease in July 2010 there are substantial risks that can
further to 4.9% of GDP given the carry-over from endanger the fiscal consolidation path. In
the 2010 fiscal consolidation measures and the particular, there is heavy pressure on the
additional savings on the expenditure side decided authorities to reverse the fiscal consolidation
by the authorities. The latter include a reduction in measures implemented in July 2010 and to revert
energy subsidies, a freeze in pensions in nominal to policies of unsustainable spending. While this
terms, a further reduction in public employment by may provide some short-term stimulus in terms of
continuing to apply the policy of only replacing domestic demand, it will come at a cost of severely
1 of 7 departing workers, implementation of reduced growth potential in the medium- to long-
further health-sector reforms, and an improvement run.
Table II.22.1:
Main features of country forecast - ROMANIA
2009 Annual percentage change
bn RON Curr. prices % GDP 92-05 2007 2008 2009 2010 2011 2012
GDP 491.3 100.0 2.2 6.3 7.3 -7.1 -1.9 1.5 3.8
Private consumption 308.3 62.8 4.7 11.9 9.0 -10.6 -1.6 1.8 3.9
Public consumption 89.0 18.1 1.1 -0.1 7.2 0.8 -3.9 -1.0 1.7
Gross fixed capital formation 126.0 25.6 8.2 30.3 15.6 -25.3 -9.9 4.2 7.3
of which : equipment 55.0 11.2 11.2 28.3 10.9 -32.7 -5.4 6.3 7.3
Exports (goods and services) 153.4 31.2 11.0 7.8 8.3 -5.5 17.0 6.0 6.1
Imports (goods and services) 182.5 37.2 12.7 27.3 7.9 -20.6 12.9 6.4 8.3
GNI (GDP deflator) 481.9 98.1 2.1 6.1 8.1 -6.2 -2.2 0.9 3.8
Contribution to GDP growth : Domestic demand 5.7 15.9 11.9 -14.8 -4.2 2.0 4.5
Inventories -1.7 0.0 -3.5 0.4 1.8 0.0 0.5
Net exports -1.6 -9.6 -1.0 7.3 0.5 -0.5 -1.3
Employment -2.6 0.4 0.0 -2.0 -0.8 0.1 0.6
Unemployment rate (a) 6.6 6.4 5.8 6.9 7.5 7.4 7.0
Compensation of employees/head 65.1 22.0 31.9 10.5 1.8 3.3 4.2
Unit labour costs whole economy 57.2 15.2 22.9 16.6 2.9 1.9 1.0
Real unit labour costs -1.6 1.5 6.6 13.4 -3.2 -2.6 -4.0
Savings rate of households (b) - - - - - - -
GDP deflator 59.8 13.5 15.3 2.8 6.3 4.6 5.1
Harmonised index of consumer prices - 4.9 7.9 5.6 6.1 5.5 3.2
Terms of trade of goods 0.8 10.6 3.2 0.1 0.0 1.0 0.5
Trade balance (c) -7.4 -14.3 -13.6 -5.8 -4.6 -4.4 -5.0
Current account balance (c) - -13.6 -11.4 -4.5 -5.5 -5.6 -6.2
Net lending(+) or borrowing(-) vis-à-vis ROW (c) -4.9 -13.0 -11.0 -4.0 -5.1 -5.1 -5.7
General government balance (c) - -2.6 -5.7 -8.6 -7.3 -4.9 -3.5
Cyclically-adjusted budget balance (c) - -5.1 -8.9 -8.6 -6.1 -3.5 -2.6
Structural budget balance (c) - -5.0 -8.4 -9.0 -6.3 -3.5 -2.6
General government gross debt (c) - 12.6 13.4 23.9 30.4 33.4 34.1
(a) Eurostat definition. (b) gross saving divided by gross disposable income. (c) as a percentage of GDP.
133
