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

Romania’s SBA arrangement with IMF remained in limbo until after November’s presidential elections. It is not clear why, but a good guess would be the 5pps cut in the social security contributions. The government was not able to explain how would it offset the expected drop in revenues and the Fund’s representatives issued a release mentioning “certain issues” remained unsettled. In the meanwhile, the government already endorsed the bill on social security contributions cut. The lawmakers will reportedly endorse the bill in early July. The 5pps will take effect as of October. Independent Fiscal Council says that the cut will probably not hurt dramatically the budget balance this year – but it threatens seriously government’s capacity to meet the 1.4% of GDP 2015 deficit target.

The appointment of a new board of directors at the central bank is the other major story for the period covered. In essence, deputy governor Cristian Popa [49] – with no political orientation and supported in the past by parties with opposed orientations, was replaced by the politically active Liviu Voinea [39] – formerly budget minister. Voinea is followed at the central bank by Gheorghe Gherghina – an expert in accounting, rather known for his expertise in preparing budget projections for the past two decades irrespective of the government’s political orientations. The new board of directors at Romania’s central bank might favour stronger currency rather than low interest rates, bankers reacted to the replacements.

Short-term economic indicators for April indicate as expected certain slowdown largely generated by the fewer workdays. We are not particularly concerned about the industrial slowdown -- while the weak activity in construction is a more relevant pattern that reveals low public investments. Easter was celebrated this year in April -- as opposed to May last year, and this generated effects that cannot be fully filtered out by the seasonal and workday adjustments. However, the industrial expansion eased only gradually -- while more dramatic effects [caused not by the workdays but by budget constrains] were seen in the constructions sector.

Detailed Q1 GDP data, under first preliminary form, were released. Romania’s GDP increased by a real 3.8% y/y to RON 162.7bn (EUR 36.1bn) in the first quarter of 2014 driven by the robust growth in industrial production, according to the first estimate released by the statistics office on June 4. On the utilisation side, consumption expanded by 5.4% y/y, while gross capital formation, on the opposite, contracted by 10.4% y/y [a 7.8% y/y contraction for gross fixed capital formation]. Household consumption expanded by 5.8% y/y.

Key Points
• Romania’s stand-by deal with IMF remains in limbo until after autumn 2014 elections
• Major Romanian opposition parties agree on joint candidate in autumn 2014 presidential vote; fail to come up with a single candidate yet
• Leftist PSD wins 37.6% of votes, half of MEPs in European elections
• World Bank revises up Romania’s GDP forecast to 2.8% in 2014 on rising investments
• Industry, domestic consumption drive Romania’s Q1 GDP up 3.8% y/y
• Budget deficit narrows by 71% y/y to 0.14%/GDP in April 2014
• Romania’s ESA public debt hits 40% of GDP at end-Feb 2014
• Romanian banking system posts record 6.3% annualised ROE in Q1 2014
• Local currency lending gains ground in April 2014
• Romania’s end-May forex reserves at lowest level in four years