Romania Watch: Low level of current account deficit recorded in August

According to our estimates, the deficit for foreign trade with goods and services decreased visibly in August, interrupting the upward trend materialized during February-July. Thus, according to our in-house seasonally adjusted data, the deficit for foreign trade with goods and services was close to EUR 1.1 bn in August, down from EUR 1.4 bn in July. Due to the drop recorded in the foreign trade deficit, the current account deficit decreased also substantially in August, to EUR 1.1 bn from EUR 1.4 bn in July. This was the second lowest level recorded since the beginning of this year.

Favorable development of foreign trade balance in August was due to the good performance of exports of goods and services, while imports recorded a slight contraction. Thus, exports of goods and services advanced rapidly in August, by 3.9% in EUR equivalent as compared to July. The large monthly dynamic was boosted both by increase in exports of goods (+3.3% from July) and by increase in exports of services (+5.7% from July). Otherwise, imports of goods and services decreased by 0.3% in EUR equivalent in August from July, as imports of goods decreased by 2.0% and imports of services increased by 8.7%. Our current estimates place the deficit for foreign trade with goods and services from August at 5.3% of GDP estimated by us for this month, and the current account deficit at 5.2% of GDP.

Revisions by central bank of the balance of payments data for January 2020 – July 2021 and by statistical office of nominal GDP for Q2 2021 have resulted in a lower level of the current account deficit as estimated by our seasonal adjustment model for period January-July 2021 (6.8% of GDP as compared with 7.2% of GDP estimated previously). According to our estimates, the current account deficit for January-August amounted to 6.6% of the GDP estimated by us for this period. Our baseline scenario places the current account deficit at 6.5% of GDP for the full year 2021, substantially above the level of 5.0% of GDP recorded in 2020. However, we believe that the balance of risks related to our baseline scenario above-mentioned remains tilted to the upside. Both the foreign trade deficit and the current account deficits recorded low levels in August, which we do not expect to be repeated in the subsequent months.

During January-August, the current account deficit was only 62.1% 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 from the EU the pre-financing for the National Recovery and Resilience Plan (approved by the European Commission on 27 September). 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.

Revision by the central bank of balance of payments data resulted in a substantial improvement of its estimates for net FDIs inflows in 2020, to EUR 3 bn from EUR 1.9 bn estimated initially. In addition, net FDIs inflows recorded a very elevated level in January-August this year, amounting to 2.8% of GDP (above the levels of 2.2%-2.7% of GDP recorded during 2016-2019).