Wide Angle Shot: Romania as perfect reflection of CEE crisis outperformance

High-frequency indicators for 2020 and current GDP data suggest that Romania and most other CEE countries navigated the COVID-19 crisis during 2020 in a better way than most of the major and more developed economies inside the EU. Each of the first 3 quarters of 2020 GDP was on average 6.4% lower in Romania vs Q4 2019 (the EU average quarterly GDP was 7.2% lower). Excluding agriculture which was awful in 2020 because of adverse weather conditions, GDP was in Romania 5.4% lower during Q1-Q3 2020 vs Q4 2019, one of the least severe contractions at the EU level. We estimate the overall GDP 2020 GDP drop in Romania at -5% in 2020 (more or less similar to Germany), vs. 6.8% for the euro area as a whole. This is an outperformance in absolute and relative terms and in contrast to the Global Financial Crisis (GFC), when GDP in Romania plummeted by 5.6% in 2009 and by only 4.5% inside the euro area.

The more limited GDP declines in Romania and other CEE countries can probably explained to a large extent by a lower share of services and probably by a better control over pandemic (in most cases). Romania has one of the lowest shares of services in GVA among the EU countries (65% in 2019 vs 73% EU average). Moreover, the higher share of industry in GVA in CEE acts as a stabilising factor as well. Also, the share of services most sensitive to Covid-19-related restrictions — Air transport, Accommodation and food service activities, Administrative and support service activities, Arts, entertainment and recreation — is lower in Romania and most CE/SEE countries than the EU average. On the opposite side, the Air transport sector was contracting stronger in Romania vs the EU median. The turnover in the sector was decreasing by some 63% in 2020, only in 4 countries in EU the contraction had been stronger than in Romania (UK with -87%, Cyprus -76%, Greece -67% and Sweden -65%).

By more granular sectors, turnover in most of the economic sectors in Romania during the first 9 months of 2020 was performing better than the median in EU. For example, sectors like Postal and courier activities, Computer programming and broadcasting activities, Advertising and marketing research, Land transport and transport via pipelines, Repair and installation of machinery, Services for buildings, Beverages, Chemicals — were sectors which grew the fastest in Romania among all EU countries. At the same time, the sector of Travel agency, tour operator and other reservation service and related activities is the sector which suffered the most dramatic decrease during pandemic at the EU level, but in Romania its contraction was the lowest. By sectors, the best performing sectors in Romania during the pandemic were Online retail sales (+34% yoy in Jan-Nov 2020), Repair and installation of machinery (+24% yoy in Jan-Nov 2020), Information technology (+24% yoy in Jan-Nov 2020), Postal and courier services (+24% yoy in Jan-Nov 2020), IT services (+13% yoy in Jan-Nov 2020), Advertising and marketing research (+13% yoy in Jan-Nov 2020), Programming and broadcasting activities (+12% yoy in Jan-Nov 2020). The worst performing sectors were Air transport (-66% yoy in Jan-Nov 2020), Travel agencies and tour operators (-43% yoy in Jan-Nov 2020), Manufacture of coke and refined petroleum products (-35% yoy in Jan-Nov 2020), and Hotels and restaurants (-32% yoy in Jan-Nov 2020).

First, the root of the problem was different, not only in Romania, but worldwide. The shock at the global level was not caused by excessive risk-taking by firms or banks, as in previous global (financial) crisis. Therefore, no sustained private sector balance sheet adjustments are needed now and like we have seen them in Romania in the aftermath of the GFC. In fact, relative to GDP the leverage of the private sector even decreased in recent years in Romania and most CEE countries. In the first 10 months of pandemic crisis, new banking loans as percentage of GDP extended to companies continued to increase in more than half of the EU countries, incl. Romania. In contrast, during the first part of the GFC the deleveraging process was quite aggressive in most EU countries. Fortunately, Romanian companies entered COVID-19 crisis in a much better shape than they entered the GFC. For instance, profitability of the companies (ROE) was 7.4% in 2019 vs 2.9% in 2008. Only the sector of State-Owned Enterprises (SOE) was still producing loses in 2019 (ROE of -1.5% or -6.9% if we exclude top 5 most profitable SOEs). Also, the leverage ratio in the corporate sector decreased in the last decade from 63% debt/assets ratio in 2008 to 45% in 2019. The liquidity ratio was improving as well, the ratio of current assets to short term debt increasing from 104% in 2008 to 194% in 2019. It is important to note that the liquidity level in the SOEs sector is lower than in private companies. It is quite clear that the SOEs sector in Romania is inefficient and needs special attention from the government.

Secondly, the COVID-19 crisis has prompted extraordinary financial support to companies by governments and central banks in a much early stage. This support has taken the form of government guarantee schemes, debt moratoria, direct support to firms via financial aid programs, and central bank lending and purchase programs. This time around counter-cyclical policies are the name of the game globally and in Europe. In all EU countries the year 2020 was characterized by strong governmental support (State guaranties, Equity injections, loans, asset purchases) in order to provide liquidity for companies, ranging according to IMF data from 1.4% of GDP in Bulgaria to 35.5% of GDP in Italy. In case of Romania the support was accounting for 3.2% of GDP, mainly through state guarantees schemes. Unfortunately, the lack of fiscal space was acting as a constraint for the capacity of the Romanian government to intervene with measures directly impacting the budget deficit. Therefore, Romania is partially paying the price for pro-cyclical fiscal policies, with a peak in the period 2016-2019.

Economic crises usually bring an increase in bankruptcies. A strong wave of bankruptcies was expected also in the wake of COVID-19 crisis. Yet during 2020, the number of corporate bankruptcies in most countries fell, in the OECD countries being 17% lower relative to 2019. Romania is not an exception, number of bankruptcies being 6.2% lower in Q1-Q3 2020 vs the same period of 2019. This decline in bankruptcy cases shows the success of the COVID-19 response measures implemented up to now. On second glance, however, it brings also some concerns about the future. The current low level of bankruptcies won’t last long. There is an intensifying debate in the literature about Zombie companies, which are companies that are unable, in the long-term, to cover their debt-servicing costs from profits. The number of Zombie companies increased in the decade after the GFC, as low interest rates encouraged them to borrow more and built-up more debt. Anyway, this debate is more relevant for countries which experienced an increase in corporate debts before the pandemic, which is not the case in Romania. In case of Romania the level of corporate sector indebtedness actually decreased after the GFC. Ultimately, however, the debt sustainability of states and companies is not only a matter of the degree of indebtedness, but also of the growth of the economy and corporate earnings (and both factors are related with each other). In this context, it is crucial that we expect a more significant economic recovery in the case of Romania, but also in Europe as a whole, than in the aftermath of the global financial crisis. Romania even had to record two years of negative GDP growth back then (2009 & 2010). This time, in light of a much more pro-cyclical policy stance and healthier balance sheets in the private sector, we expect a significant macroeconomic rebound. Currently, we see GDP growth in Romania at 4-4.5% in 2021 and 2022 (following a GDP decline of ~5% in 2020). In the aftermath of the Global Financial Crisis, real GDP growth in Romania averaged "only" 2.5% (2011-2013), after 2 years of GDP contraction in 2009 and 2010 with a real GDP loss of -9.5% on aggregate. Overall, we remain constructive on the economic backdrop for 2021 in Europe, despite current uncertainties (see also our Wide Angle Shot: Wide Angle Shot: Stronger recovery in Europe & CE/SEE in 2021 than back in 2010). Moreover, we do not expect such a dismal performance in Europe like in the aftermath of the GFC, as this time we do not see a “euro area crisis” derailing the recovery (like it happened from 2011-2013) given current decisive and coordinated policy responses at the EU level.

Of course, the question will then also arise at some point when and how the funds and public money used in the crisis can be recovered and the debt levels in the public sector (in relation to economic output) can be stabilized and reduced again. This should then be a topic for the years 2022 and 2023 in particular. After the recovery in 2021, which was partly bought by support and bridge money and certainly mainly consumption-driven, we should then see a broad and self-sustaining recovery in 2022 and 2023. Here it would be desirable if, in the case of Romania, this time it were possible to turn away from very pro-cyclical fiscal policies in economically good times, as it was possible in almost all CE/SEE countries in the run-up to the COVID-19 crisis.

On the 12th of February Ionut Dumitru, our Chief Economist at Raiffeisen Bank Romania, was invited to share some of our assessments also presented here at a joint Virtual Conference hosted by the National Bank of Romania and the IMF (Corporate Liquidity and Solvency in the Covid-19 Pandemic: The Role of Policies) on the occasion of the presentation of IMF’s Regional Economic Outlook for Europe.