This report covers the main Romanian macroeconomic releases of June 2014 [plus half of July] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to May.

Romania’s statistics office has adjusted upwards the first-quarter GDP growth to 3.9% y/y, under its second preliminary estimate. While the corrections on the Q1 GDP formation side are rather negligible, the adjustments on the utilisation side are quite important. Essentially, consumption was weaker than initially estimated, and gross fixed capital formation was also weaker than initially estimated, while a larger share of the GDP was allocated to net exports.

Industry and exports kept growing robustly in Apr-May, yet at slower rates compared to Q1. The combined industrial growth of 6.7% calculated for April-May smoothens out the volatility and gives a hint on the Q2 performance. The government’s forecasting body projects a 4.3% annual expansion of the industrial output this year. This will further ease to 2-3% in 2015-2017 from 7.8% in 2013. Stronger external demand, compared to the forecasting body’s assumptions, might however result in slightly better performance this year. Romania’s exports increased by 7.9% y/y to EUR 4.34bn in May thus returning closer to the two-digit growth rates seen in the first quarter of 2014 and in 2013, the statistics office reported. For Apr-May 2014, exports advanced by 5.0% y/y, slowing down from the 10.1% y/y jump in Q1.

Budget consolidation still driven by lower capital expenditures, with impact on constructions sector. For full Jan-May, government’s deficit was 0.24% of year’s projected GDP – against 1.04% last year and a 2.2%-of-GDP full-year target. Last year, the deficit was 2.5% of GDP. The drivers of the fiscal consolidation remained however unsustainable in Apr-May. Smaller fiscal deficit was the outcome of fewer public investments pushed down by lingering infrastructure projects, and fewer co-financing of EU-funded projects that are partly at a deadlock.

The volume of activity plunged by 9.6% y/y in Jan-May, driven by the massive 26.4% contraction in civil engineering.

The non-performing loans ratio in Romania edged down to 22.24% at the end of April from 22.26% a month earlier. Nonetheless, the NPL ratio is among the highest in the region and the banks’ aggregate profits for 2013 was recently backwards adjusted from RON 500mn [EUR 110mn] to only RON 50mn.

Key Points
• Romania adjusts Q1 GDP growth upwards by 0.1pps to 3.9% y/y on stronger external demand
• Industrial output up 12.5% y/y in May 2014, posting 6.7% combined growth for Apr-May
• Construction works down 10.7% y/y in May 2014
• Retail sales up 9.2% y/y in May 2014
• CPI inflation eases to 0.66% y/y in June on lower food prices, strong currency
• Budget deficit narrows 73% y/y to 0.1% of GDP in Apr-May 2014
• President Basescu refuses to promulgate bill on lower social security contributions
• Romania’s current EU funds absorption up by modest 2.6pps in H1 2014
• ESA public debt-to-GDP ratio up 1pps y/y to 39.5% at end-April 2014
• NPL ratio slightly down to 22.24% at end-Apr 2014
• Bank loans 2.1% down y/y at end-May; currency substitution eases; Rise in bank deposits eases to 6.6% y/y at end-May
• Central bank cuts required reserve ratio for forex liabilities by 2pps to 16%
• Romania’s C/A balance swings into EUR 351mn deficit in Jan-May, on rising FDI dividends