Romania Watch: Large external imbalances persist
Current account deficit widened to 7.5% of GDP in Jan-Sep 2024 from 7% of GDP in 2023. The enlargement was fuelled by increase of foreign trade deficit as weak external demand hampered exports' growth and solid increase in domestic demand inflated imports.
Current account deficit persists at elevated levels. According to our in-house seasonally adjusted data, in September the current account deficit stood at 7.6% of the nominal GDP estimated by us for this month. The level was close to that of 7.5% of GDP recorded during January-August.
The current account deficit was on the increase starting mid-2023, and its level during Q3 2024 year (7.7% of GDP) largely outpaced that recorded in Q3 2023 (7.0% of GDP). The enlargement of the current account deficit over the recent five quarters has been almost exclusively supported by the increase of the foreign trade deficit in goods and services. According to our in-house seasonally adjusted data, the foreign trade deficit in goods and services stood at 5.8% of GDP in Q3 2024, a level much above that of 4.8% of GDP recorded in Q3 2023. Exports of both goods and services had a poor performance over the past year (+0.5% yoy in terms of value for exports of goods in Q3, and +3.1% yoy for exports of services), being hampered by fragile foreign demand and by loss of competitiveness for some domestic industries. On the other hand, imports of goods and services increased at a solid pace over the past year on the back of strong advance in domestic demand (consumption and investments). In value terms, in Q3 imports of goods increased by 5.0% yoy, while imports of services increased by 5.2% yoy.
We expect the current account deficit to be close to 7.8% of GDP this year, and to decrease only slightly in 2025, to a level of 7.2% of GDP. Exports’ growth would probably remain contained in the coming period given that only a gradual rebound is foreseen in case of external demand, and this should limit the improvement of the current account deficit in the coming period.
Our estimates and seasonally adjusted data show that only 34.2% of the current account deficit in the first nine months of the year was financed by "healthy" financing sources (mainly capital transfers from the EU and net foreign direct investment). Net portfolio inflows, mainly consisting of acquisition of Eurobonds by non-residents, were very large during January-September, allowing the current account deficit to be easily funded (four Eurobond issuances and a teaser green Samurai Bond). As a result, net portfolio inflows totaled EUR 14,2 bn during January-September, or 4% of the GDP estimated by us for the full year 2024. Also, the central bank's FX reserves recorded net inflows amounting to EUR 5.7 bn during January-September, while EURRON exchange rate remained very stable.
Borrowing from foreign markets through the sale of Eurobonds is necessary to ensure an adequate financing of both the public budget deficit and of the current account deficit. Under these circumstances, we believe that the implementation of sound macroeconomic policies remains essential to maintain investors' interest in Romanian assets. All eyes are now on the fiscal consolidation measures expected to be announced and enforced after parliamentary elections.
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Nicolae COVRIG
Romania Nicolae has 20 years of experience in applied macroeconomic research, working as a financial analyst in the Economic and Sectoral Research Directorate of Raiffeisen Bank Romania. Nicolae is also an associate lector at the Bucharest Academy of Economic Studies, Department of Money and Banking. Previously, he worked as an economist in the Macroeconomic Modeling and Forecasting Directorate from the National Bank of Romania and as an assistant professor at the Department of Money and Banking from the Bucharest Academy of Economic Studies. Nicolae has a master's degree at the Doctoral School of Banking Finance (DOFIN) and a PhD in finance at the Bucharest Academy of Economic Studies. Nicolae is a member of CFA Institute and CFA Romania. He is passionate about macroeconomics and psychology.
Andreea-Elena DRAGHIA
Romania Andreea Draghia is a financial analyst at Raiffeisen Bank in Bucharest. She joined the Economic and Sectoral Research team in June 2020 primarily focusing on the developments in the Romanian economy. Prior to joining Raiffeisen Bank she worked as an economist at the Romanian Fiscal Council. She graduated the Faculty of Finance, Insurance, Banking and Stock Exchange and has a master’s degree in finance at the Advanced Research in Finance (CEFIN) within the Bucharest University of Economic Studies. Andreea is interested in macroeconomics and econometrics and has a passion for technology and travelling.
Inflationary pressures remained high in October and the annual inflation rate of 4.7% exceeded expectations. We see room for central bank to restart the key rate cutting cycle only in the second half of 2025 when disinflation process would resume. |
The NBR kept today the monetary policy interest rate unchanged at 6.5%, matching economic analysts’ expectations. The central bank's new inflation forecast places the annual inflation rate above the upper limit of 3.5% of the target inflation band until end-2025. We expect the NBR to resume the key rate cutting cycle only in the second half of next year. |
Annual inflation rate decreased to 4.6% in September from 5.1% yoy in August. Underlying inflationary pressures remained elevated in September, and we don't expect them to reduce materially in the coming period. Disinflation process might take a pause in the following quarters, limiting the room of the central bank to cut the key rate. |
As expected, the central bank kept the monetary policy rate unchanged at 6.5% today. We expect the the key rate to be reduced to 6.25% in November but see risks for this cut not to materialize. Afterwards, we expect the NBR to be on hold until August 2025. |
Public budget deficit (cash terms) from January-August amounted to 8.3% of GDP in January-August. Our baseline scenario places this year's public budget deficit at 7.5% of GDP (cash terms), but we see material risks for exceeding this target. |