Romania’s external balance has improved significantly recently and, on the internal side, price stability is improving visibly [while full employment – the other requisite for internal stability is still a remote target. The problem is that several issues – including weak employment and weak competitiveness of the economy, put a serious question mark over the achievements underlined above. Consumption and investments remain at very low level.

On the upside, GDP recovering to 2008 level next year would mean in fact a visible step forward from the unsustainable situation in the year before recession [2008]. While at that time a large part of the GDP was contributed by high profit ratios in constructions, real estate, financial services and services financed by foreign inflows, next year such elements of the GDP would be at much lower levels. Automobile industry and agriculture have increased their share in GDP.

Further development depends on investors and consumers’ confidence [besides external circumstances – external demand and capital inflows], but there are no grounds to infer such positive developments in the coming quarters. The deterioration of the political stability would further put at risk the thin hopes for confidence-driven growth.

The Current Account moved to the surplus area and will remain on the positive side for full year, most likely. The CA balance turns to EUR 489mn surplus in January to July, equivalent to 0.35%/GDP. In the rolling 12-month period ending July, the country’s CA balance was still negative with a EUR 1.6bn deficit [1.2% of this year’s GDP]. The headline inflation will probably enter the targeted band and the industrial price inflation turned negative in August for the first time in the post-communist period.

Romania’s consumer price inflation eased to 3.7% year on year in August from 4.4% year on year in July and 5.4% year on year in June . Romania’s central bank sees the end-year headline inflation at 3.1% year on year and also forecasts that the annual inflation would remain within the 1.5%-3.5% target band for the two-year horizon envisaged.

Aggregate demand remains subdued on multiple drivers. The government achieved primary budget surplus for January to August and the households are building on their positive balance with banks – both with a negative impact on the aggregate demand. January to August primary balance shows a 0.05%/GDP surplus in the period, demonstrating that the budgetary policy is prudential and sustainable, the ministry commented.

Households’ net balance with the banks [deposits minus loans] has improved by EUR 2.2bn over the past year ending August 2011 and by EUR 9.2bn since the end of October 2008 [at the outset of the credit crunch].

Finally, the use of EU funds remains weak therefore not stimulating demand. The EU funds absorption rate increased marginally by 1pps in September to 21.1% [of the funds earmarked under the 2007-2013 EU budget]. Romania thus absorbed only EUR 200mn [0.15% of GDP] of EU funds in September.

The banking system remains in the recovery mode. Romania’s government has decided to allow collective trials against banks, that are to be son made responsible in court for the abusive clauses included in the loan contracts enforced unilaterally against individuals based on their bargaining power [and alleged collusion].

Collective processes against banks and the subsequent cancellation of illegal clauses in the lending contracts could cost the banks RON 5bn [EUR 1.1bn], the central bank has estimated in a report earlier this year. The official NPL ratio reported by Romania’s central bank increased to 20.93% at the end of July from 20.3% one month earlier, while tyhe cost of provisioning keeps rising under both IFRS and RAS calculations at rates comparable to those seen in the past 12 months – according to our calculations based on central bank data.