The report covers info as of April 17.

The consensus expectations for Romania’s medium-term growth are improving. S&P projects average 3% p.a. growth on medium run. But there remain some concerns – mainly related to the effects of government’s planned major fiscal reforms. Furthermore, the improvement in investors’ sentiment might have been driven to some extent by the anti-corruption actions and expected positive impact. The reasoning is in principle correct, but the judicial reforms still need to consolidate and to yield a chain of predictable in court. Other driver for positive expectations is the rise in domestic consumption and investments – which remain to be confirmed. Absorption of EU funds remains very disappointing.

Furthermore, the banking system is far from a fast recovery mode. Recent data reveal that the build-up of loans in households’ and companies’ portfolios remained in the negative area in Q4 last year despite more optimistic expectations. Also in the banking system, the balance sheet cleaning, which has advanced robustly since May to December last year, has surprisingly reversed in Jan-Feb.

The planned fiscal reforms are a source of uncertainty. The government cut the VAT rate for food to 9% [from standard 24%] effective June 2015 already. More rate cuts are expected in January, when the revised Fiscal Code is scheduled for enforcement. In principle, lower taxes could spur growth and there is room for such cuts provided tax evasion is reduced. The problem is that the tax collection has traditionally been particularly weak. The tax collection agency ANAF took visible steps to cut tax evasion, but actions in critical sectors such as alcohol, petroleum products trading, fruits and vegetables import and generally the imports in Constanta port, have not been visible yet.

Key Points

• Households’ stock of long-term loans [over 1yr maturity] picked up in Q4 – but the net flow of loans [transactions] remained in the negative area
• Cooperation and Verification Mechanism is driving judicial reforms in Romania, Bulgaria – EC official
• Opposition’s plans to oust government lose momentum
• Government reportedly discussed fiscal reforms with IMF in Washington, SBA remains in limbo
• Statistics office revises 2014 GDP growth 0.1pp down to 2.8%
• IMF forecasts Romania’s growth at 2.7% in 2015
• S&P affirms Romania’s rating, projects robust 3% p.a. growth in medium term
• Industrial growth strengthens to 3.2% y/y in February
• Construction works up 14.8% y/y in Jan-Feb from low base
• CPI inflation accelerates to 0.8% y/y in March, VAT rate cut effect expected
• Net wage up real 6% y/y in February; Romania's ILO unemployment down 0.6pp to 6.4% in February
• Government announces 0.33% of GDP budget surplus in Jan-Feb; Government’s 0.2% of GDP surplus in Q1 supports VAT rate cut plans – PM Ponta
• Fiscal Code bill seriously threatens fiscal stability – Fiscal Council
• Romania should reconsider size and timing of planned tax cuts – IMF
• New minister admits Romania might absorb less EU funds than planned this year
• Romania not ready to enter ERM II in January 2016 – c-bank governor Isarescu