Romania’s current account (CA) deficit widened by 24% in January-July y/y to over €6bn, country’s central bank informed. Net foreign direct investments (FDI) rose by 24% y/y to €2.9bn.

The CA deficit is one of the main threats to Romania’s macroeconomic sustainability with the other being the budget deficit.

The CA to GDP ratio calculated for the year to date period thus deteriorated from 2.4% in January-July last year to 2.9% in the same period this year, despite the significant (nearly 10%) rise of the nominal GDP calculated for the past 12 months ending June.

Although the CA deficit, FDI and external debt have all risen fast over the last few years, FDI is not keeping pace with the widening external deficit and this resulted in rising gross external debt that has been partly offset by the robust GDP growth (particularly in nominal terms) and the external indebtedness (the debt to GDP ratio) has actually improved compared to several years ago. 

A trend analysis based on the rolling 12 month CA, FDI and the instant external debt shows that the widening CA deficit over the last few years (the gap neared balance in early 2015) not matched by stronger FDI pushed up the country’s external debt to all time high of €107bn at the end of July. The country’s external debt rose by more than €10bn over the past 12 months ending July 2019.

The rolling 12-month CA deficit, calculated as the combined deficit over the previous twelve months, rose by 52% y/y and hit €10.3bn or 4.9% of the period’s GDP. Net FDI over the rolling 12 months ending July rose by only 13.2% y/y to nearly €4.6bn.

Thus, FDI covered less than 54% of the CA gap in the past 12 months, compared to a ratio of nearly 73% during the previous 12 months.

However, the debt to GDP ratio has improved significantly compared to the end of 2015: from 57.4% to 51.1%. Indeed, one year earlier at the end of July 2018 the ratio was lower (50.4%) and this indicates a certain deterioration of the country’s external position. But from a broader perspective the ratio is certainly not on a steep upward pattern and possibly not even rising.

The rise in external debt over the past 12 months might overstate the need to finance the CA deficit and has partly contributed to the accumulation of foreign reserves, more detailed analysis shows.

The IMF projects Romania’s CA gap will rise from 4.5% of GDP last year to 5.5% of GDP in 2019 to narrow to 5.2% of GDP in 2020. However, the fund expects, on a rather optimistic note based on robust GDP growth, the external debt to GDP ratio to actually narrow from 48.5% at the end of 2018 to 46.5% two years later, at the end of 2020. A key assumption here is the share of the CA gap financed by FDI and transfers from the EU budget, both of which have been sluggish recently.

CA balance EUR mn	2018	2018	2018	2019	2019	2019	Balance	Balance
Jan-Jul	Inflows	Outflows	Balance	Inflows	Outflows	Balance	y/y ch.	y/y ch.
Current Account	53,927	58,786	-4,859	57,289	63,314	-6,025	24.0%	-1,166
A. Goods and services	48,968	51,695	-2,727	51,790	56,150	-4,360	59.9%	-1,633
a. Goods	36,385	43,762	-7,377	37,146	46,592	-9,446	28.0%	-2,069
b. Services, o/w	12,583	7,933	4,650	14,644	9,558	5,086	9.4%	436
manufacturing services...	1,645	111	1,534	1,741	98	1,643	7.1%	109
transport	3,784	1,614	2,170	4,508	1,987	2,521	16.2%	351
tourism-travel	1,232	1,992	-760	1,332	2,368	-1,036	36.3%	-276
other	5,922	4,216	1,706	7,063	5,105	1,958	14.8%	252
B. Primary income	2,630	5,952	-3,322	2,745	5,347	-2,602	-21.7%	720
C. Secondary income	2,329	1,139	1,190	2,754	1,817	937	-21.3%	-253
Source: BNR