Romania Watch: Current account deficit decreased substantially this year
Foreign trade deficit and current account deficit have reduced substantially from their peaks in Q3 2022. Foreign trade deficit from July was one of the lowest observed this year. We foresee the current account deficit at 7% of GDP in 2023, down from 9.3% of GDP in 2022.
According to our in-house seasonally adjusted data, the deficit of foreign trade with goods and services decreased to a level slightly below EUR 1 bn in July, amounting to approximately 3.6% of our estimated nominal GDP for this month. This was one of the lowest monthly foreign trade deficits recorded this year. The favorable development in the foreign trade balance in July was supported by both a reduction in the deficit of foreign trade with goods and an increase in the surplus of foreign trade with services.
However, according to our in-house seasonally adjusted data, there was a deterioration in the current account deficit in July, which increased to EUR 2.4 bn (representing approximately 9% of our estimated nominal GDP for this month). The widening of the current account deficit in July was fueled by a very large deficit for the primary income balance (EUR 1.5 bn according to our in-house seasonally adjusted data) as the central bank estimated very large profits for companies classified as foreign direct investments (FDIs). We consider these significant profits estimated for July to be a transitory development that temporarily amplified the current account deficit this month, without repeating in the following months. At the same time, we do not exclude the possibility of a downward revision of this value to a certain extent in the coming period. For example, the new data that were released by the NBR yesterday showed a substantial downward revision of the FDIs' profits for Q2, and implicitly a downward revision of the primary income balance deficit by approximately EUR 937 mn compared to initial estimates. So, considering the new estimates, our in-house seasonally adjusted data place the current account deficit at EUR 5.1 bn in Q2 (or 6.5% of this quarter’s nominal GDP), a visibly lower level than the initial estimates indicated (EUR 5.9 bn or 7.5% of the GDP).
Decrease of the foreign trade deficit and the current account deficit starting Q3 2022 was supported by decrease in commodity prices and by decrease in imports’ volume on the back of reduction of consumption of energy products and of weakening of domestic demand. Our seasonally adjusted data place the current account deficit for the first seven months of this year at 6.5% of the nominal GDP estimated by us for this period, down from a level of 9.3% of GDP realized in 2022. Our current scenario assumes a current account deficit of 7% of GDP for this year.
According to our in-house seasonally adjusted data, “healthy” foreign capital inflows, i.e. capital transfers from the EU and net FDIs, covered around 61.5% of the current account deficit observed during January-July 2023. We expect the transfers in EU funds from the European Commission to increase in the second half of this year as compared with the first half of the year, resulting in an improvement of this coverage ratio. The implementation of the National Recovery and Resilience Plan is much behind the plan, and funds’ disbursements in 2023 are likely to come short of our initial expectations (only EUR 2.8 bn instead of around EUR 5.5 bn). However, in January-July, Romania recorded very large portfolio inflows, totaling EUR 12.8 bn or 4.0% of our GDP estimate for the full year. Romania had three Eurobond issuances this year (two in January and one in September), borrowing a cumulative EUR 9.1 bn, and completely fulfilling this year’s borrowing target in Eurobond issuances (set at EUR 7.5-8.5 bn). Also, non-residents have substantially increased their holdings of Romanian government bonds during the first part of the year (by RON 30.3 bn). So, the very large portfolio inflows already observed by the date would ensure the full funding of the current account deficit this year if they would not be reversed by the end of this year.
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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.
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.
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