Romania Watch: Large current account deficit of 7.2% of GDP during January-July

According to our in-house seasonally adjusted data, both the foreign trade deficit and the current account deficit have been on an upward trend since February. As a result, according to our computations, the current account deficit increased from 5.5% of GDP in Q4 2020, to 6.6% of GDP in Q1 2021 and to 7.8% of GDP in Q2 2021.

Enlargement of the foreign trade deficit this year has been driven by a faster increase of imports of goods and services than the increase in exports. Exports’ growth slowed down substantially this year, both in the case of goods and of services, due to the bottlenecks existing in the global production and distribution chains. Imports’ growth also slowed down this year, but to a lower extent as the growth of domestic demand remained solid.

Balance of payments data that were released on Monday revealed an elevated level of the deficit for foreign trade with goods and services in July too, totaling 7.5% of the GDP estimated by us for this month (above the level of 6.7% of GDP recorded in Q2). The monthly advance of imports of goods and services (+3.1% in EUR equivalent) again outpaced the monthly advance of exports of goods and services (+0.7% in EUR equivalent). The current account deficit decreased in July from its level in June but still remained elevated (amounting to 6.9% of the GDP estimated by us for July). The decrease of the current account deficit in July resulted from lower estimates of the central bank for profits of FDI companies. However, the current account deficit is more volatile than the foreign trade deficit, and the persistent increase of the foreign trade deficit implies upward pressures on the current account deficit as well in the medium term.

Our baseline scenario places the current account deficit at 6.5% of GDP for the full year 2021, but very likely will we revise our forecast upwards in the following period. According to our estimates, the current account deficit from January-July amounted to 7.2% of the GDP (in the same period) and a visible improvement of this figure seems unlikely until the end of the year.

During January-July, the current account deficit was only 58.2% covered by “healthy” foreign capital inflows, i.e. capital transfers from the EU and net FDIs. We expect the coverage of the current account deficit by “healthy” foreign capital inflows to improve by year-end as Romania should receive the disbursements via the NGEU instrument. The large current account deficit and its weak funding structure are important vulnerabilities and reasons for us to expect the leu to remain on a gradual depreciation trend going forward.