Risks and Vulnerabilities: Romania

Euromonitor International
09 June 2014

The Romanian economy is gradually recovering from the eurozone debt crisis beginning in 2011, with real GDP
growth backed by robust industrial exports and a bumper harvest in 2013. The countrys fiscal position and external
sector continue to be backed by external funding in the short term. However, structural challenges, such as
corruption, institutional weaknesses, high unemployment and an ageing population, constrain development. Fiscal
consolidation, bank asset quality and a depressed property market are near-term risks.

EXECUTIVE SUMMARY
Annual real GDP growth in 2013 stood at 3.5%, up from 0.5% in 2012 on the back of improved industrial
exports and strong agricultural output. While external funding has helped the economy cope with financing
crunches, structural reforms are critical for economic stability;
Rampant corruption renders the administrative and legal system inefficient. Romania ranked 69th out of 177
countries (jointly with Italy and Kuwait) on the Transparency International Corruption Perceptions Index in
2013;
The countrys current account deficit improved substantially from US$7.5 billion or 4.4% of total GDP in 2012
to US$2.1 billion or 1.1% of total GDP in 2013, on the back of robust exports growth and external funding. In
July 2013, the Romanian government obtained a 24-month precautionary balance-of-payments assistance until
September 2015, involving funding worth 2.0 billion from the European Union (EU) and Special Drawing
Rights worth SDR1.8 billion (equivalent to about 2.0 billion) from the IMF;
In 2013, the government recorded a general government budget deficit of RON14.3 billion (US$4.3 billion) or
2.3% of total GDP. In the medium term, the fiscal plan includes expansion of the tax base; simplification of
taxation system; prioritisation of resource allocation; and reduction of wasteful expenses;
While the banking sector remains resilient, asset quality has deteriorated sharply against the backdrop of the
eurozone crisis starting in 2011 to become the third weakest in Eastern Europe in 2013. The ratio of bank nonperforming loans to total gross loans rose steadily from 2.8% in 2008 to 17.7% in 2013;
Romanias housing market continues to register depressed prices for the fifth consecutive year. The construction
sector also contracted, with GVA from construction declining by -4.4% (year-on-year) in real terms in 2013.
Non-delivery of economic and political reforms, as well as corruption, has adversely impacted investor
sentiment in the sector.
Chart 1

An Overview of Risks and Vulnerabilities in Romania: 2013

Source:

Euromonitor International from national statistics/IMF/UN

MAJOR COMPONENTS OF THE ECONOMY

Stable prospects in the medium-term
Impacted by the eurozone debt crisis, the Romanian economy has registered choppy growth with real GDP
contracting at a compound annual average rate of -0.4% during the period 2008-2013. Annual real GDP growth
recovered to 3.5% in 2013, from 0.5% in 2012 on the back of improved industrial exports and strong agricultural
output. The upper-middle income countrys total GDP equated to RON629 billion (US$189 billion) as of 2013,
making it the fourth largest economy (in US$ terms) in Eastern Europe.
Manufacturing continued to be the most important sector, accounting for 30.8% of total Gross Value Added
(GVA) in 2013 thanks to a well-developed engineering sector. The financial services sector accounted for
19.2% of total GVA in 2013, backed by a robust competitive banking sector.
The Manufacturing sector grew the fastest in 2013, at 11.3% (year-on-year) in real terms, followed by Education,
Health, Social Work and Other Community, Social, Personal Service Activities (9.9%). The liberalisation of
farmland transactions starting in January 2014 could serve to further bolster agricultural output in the short to
medium term. A bumper crop supported overall growth in 2013, as the agricultural and related activities sector grew
annually by 2.4% in real terms in 2013, up from -22.3% year-on-year in real terms in 2012.
Going forward, the major challenge for the Romanian economy would be to stabilise macroeconomic growth and
initiate structural reforms amidst fiscal restraint. External funding, coupled with improved prospects for the
eurozone, is expected to provide a growth-supporting environment. Annual real GDP growth for Romania is forecast
at 2.6% in 2014 and 3.1% in 2015.
Chart 2

Gross Value Added by Sector in Romania: 2013

% of total GVA

Source:
Notes:

Euromonitor International from national statistics

(1) Wholesale & Retail Trade includes Repair of Motor Vehicles, Motorcycles and Personal and Household Goods;
(2) Financial Intermediation includes Real Estate, Renting and Business Activities; (3) Public Administration includes
Defence and Compulsory Social Security; (4) Education, Health & Social Work includes Other Community, Social &
Personal Service Activities.

SOCIO-POLITICAL RISK
Corruption and unemployment are major concerns
Prime Minister Victor Pontas government has sought economic development and social cohesion in the
Programme for Government 2013-2016, whilst emphasising the need for transparent government administration
and political reform. The President in Romania is elected by popular vote. The next presidential elections are
scheduled to be held in November 2014.
Corruption is a rampant. The country struggled to meet the EU anti-corruption requirements. Romania ranked
69th out of 177 countries (jointly with Italy and Kuwait) on the Transparency International Corruption
Perceptions Index in 2013, better than peer Eastern European countries, such as Serbia (72nd) and Russia
(127th), but worse than Macedonia (67th) and Estonia (28th).
The judiciary grapples with corruption, lack of independence, political interference and staffing shortages,
making the legal system inefficient.
Chart 3

Romanias Political Stability and Absence of Violence Ranking vs. Voice and Accountability
Ranking: 2007-2012

Source:
Note:

Euromonitor International from World Bank

2012 is the latest available data

The unemployment rate in Romania has been adversely impacted by the eurozone debt crisis beginning in 2011,
rising from 5.8% in 2008 to 7.3% in 2013. The absence of labour-employer cooperation; lack of flexibility in
wage determination; and hiring and firing policies keeps the labour market rigid.
Romanias youth unemployment rate continued to rise to 24.9% in 2013 from 18.7% in 2008. Inadequate
training facilities and poor quality education is a major challenge. The male unemployment rate stood at 7.9% in
2013, while that amongst females stood at 6.6%.
Chart 4

Youth Unemployment Rate vs. Total Unemployment Rate: 2008-2013

% of economically active population aged 15-24, % of economically active population

Source:

Euromonitor International from International Labour Organisation (ILO)/Eurostat/national statistics

The country has an ageing population, with the number of persons aged 65+ accounting for 15.9% of total
population in 2013, which is forecast to further rise to 18.7% in 2020. Accordingly, Romanias old-age
dependency ratio stood at 23.2% in 2013 and is forecast to touch 28.4% in 2020, causing government finances
to come under pressure as the need for social security increases despite fiscal austerity.

In January 2014, the European Commission ended restrictions on the free movement of Romanian (and
Bulgarian) workers in all EU countries. According to the Office for National Statistics, the number of migrants
from Romania and Bulgaria stood at 140,000 in the first quarter of 2014, up by 44.0% (year-on-year) during the
same period. Free movement of Romanian labour could accelerate brain drain, as workers emigrate from the
country in search of better wages and living standards to other EU nations.
The Roma population is a minority in the country that is often socially excluded. The government has been and
continues to be committed to mainstream inclusion of Roma citizens by ensuring them access to education,
employment, health, housing and infrastructure to aid in fighting poverty and promoting equal opportunities.
This is outlined in the government strategy for the Inclusion of Romanian Citizens belonging to the Roma
Minority 2012-2020.
The Roma population has been the centre of ethnic tensions, particularly amongst central European countries,
making it a major cross-country concern. For instance in 2013, France was embroiled in Roma camp removals
and displacement of Roma population, while the right-wing party in Hungary has blamed the Roma community
for an increase in violence. These concerns rise further in the backdrop of the new free movement regulation.

EXTERNAL SECTOR
EU-IMF funding assistance supports external sector
Romania is open to trade, having a total-exports-to-total-GDP ratio of 34.9% in 2013. Thanks to improved business
sentiment and demand conditions in the eurozone, Romanian exports revived from a contraction in 2012 to register
robust growth of 13.7% year-on-year in 2013, to total US$65.9 billion in the same year. This helped improve
Romanias trade deficit from the US$12.3 billion or 7.3% of total GDP in 2012 to US$7.6 billion or 4.0% of total
GDP in 2013.
Industrial exports continue to be Romanias strong point - Machinery and Transport Equipment was the main
export item, accounting for 40.5% of total exports in 2013; followed by Basic Manufactures (17.5%). The
commodity concentration of exports indicates that Romania is vulnerable to economic downturns coupled with
cyclical and seasonal pressures specific-to the domestic machinery and engineering industry.
86.4% of Romanias total exports were targeted at Europe in 2013; Germany alone accounted for 19.0%. The
concentrated exports-destination profile makes Romania vulnerable to growth and demand conditions prevailing
in Europe.
Chart 5

Source:

Romania Top 10 Export Destinations: 2013

Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

The countrys total-imports-to-total-GDP ratio stood at 38.9% in 2013, down from 40.6% in 2008, suggesting a dip
in the role of imports in overall economic growth. Imports totalling US$73.4 billion in 2013 rose by 4.6% (year-onyear) in 2013, as demand conditions in the eurozone gradually recovered.

Machinery and Transport Equipment was the countrys largest import item, accounting for 32.8% of total
imports in 2013, followed by Basic Manufactures (19.9%) that are used as inputs in the countrys domestic
industrial units.
In 2013, 85.2% of Romanias total imports were sourced from within Europe, particularly Germany (17.6%) and
Italy (11.0%), making Romania vulnerable to region-specific supply shocks. The Asia Pacific region accounted
for 10.7% of the countrys total imports in 2013.
Chart 6

Source:

Romanias Imports by Commodity: 2013

Euromonitor International from International Monetary Fund (IMF), Direction of Trade Statistics

The current account deficit improved to US$2.1 billion or 1.1% of total GDP in 2013, from US$7.5 billion or 4.4%
of total GDP in 2012 on the back of robust exports growth and external funding. In July 2013, the Romanian
government sought precautionary balance-of-payments assistance from the IMF. The programme involving 2.0
billion funding from the EU and SDR1.8 billion (equivalent to about 2.0 billion) from the IMF, is scheduled to run
for 24 months until September 2015. Accordingly, the countrys foreign exchange reserves rose from US$40.8
billion in 2012 to US$44.5 billion in 2013.
While Romania is open to foreign direct investments (FDI) into the country, the absence of a strong institutional
framework is a major hindrance. Uncertainty prevailing in the eurozone has further kept FDI inflows to Romania on
the downslide since 2008.
FDI inflows stood at RON7.8 billion (US$2.2 billion) in 2012 (latest data available), considerably lower than
the RON35.0 billion (US$13.9 billion) in 2008.
Accordingly, Romanias FDI intensity dipped from 6.8% in 2008 to 1.3% in 2012, reflecting a decline in in the
role of FDI as a source of investment for economic growth in the country, amidst a volatile global economy and
weak eurozone.
The Romanian leu is a free-floating currency that has a market-determined exchange rate against the US dollar.
Amidst a weak global economy, particularly the eurozone, the Romanian leu depreciated from RON2.5 per US$ in
2008 to RON3.3 per US$ in 2013. The support of external funding assistance helped strengthen the currency slightly
in 2013, from the RON3.5 per US$ in 2012. As part of the EU, Romania is due to adopt the euro as its legal tender.
The initial target timeline of 2015 for currency adoption was scrapped in 2013, with 2020 being viewed as a more
likely timeframe.

GOVERNMENT FINANCE
Expenditure cuts continue in pursuit of fiscal consolidation
The Romanian fiscal policy is based on the EU Convergence Programme, which outlines a medium-term fiscal
objective of keeping the general government budget deficit below 2.0% of total GDP for Romania during the period
of 2014-2016. In 2013, the government recorded a general government budget deficit of RON14.3 billion (US$4.3

billion) or 2.3% of total GDP. In the medium term, the Romanian government plans to expand its tax base; simplify
the taxation system; prioritise resource allocation; and cut down on wasteful expenses.
As of 2013, total government revenue at RON206 billion (US$61.8 billion) stood nearly the same as in 2012
and accounted for 32.8% of total GDP. Taxes amounted to RON109 billion (US$32.7 billion) or 17.3% of total
GDP in 2013. The government has attempted to mobilise revenue from the privatisation loss-making state
enterprises in the rail, mining and gas sectors; however this has not yielded significant financial benefits to the
exchequer.
Continuing on the path of austerity, the Romanian state cut back on government spending by -1.9% (year-onyear) in real terms in 2013. Total government expenditure stood at RON220 billion (US$66.1 billion) in 2013,
accounting for 35.0% of total GDP.
Public debt amounted to RON239 billion (US$71.8 billion) in 2013, growing by 6.5% (year-on-year) in nominal
terms. As percentage of total GDP, public debt stood at 38.0% in 2013, up from 13.6% in 2008. Despite the
increase, public debt levels remain sustainable.
Notwithstanding improvements in Romanias external debt position, the governments finances are at risk,
particularly without the backing of precautionary external funding. Total external debt amounted to US$132
billion or 69.6% of total GDP in 2013. Although improved from the 2012 level of 78.6% of total GDP, it
remains substantially higher than the 2008 level of 49.1%.
Romanias sovereign credit rating was upgraded to an investment grade rating of BBB- (stable outlook) from
BB+ (positive outlook) in May 2014 from rating agency Standard and Poors (S&P). Also, while Moodys
reaffirmed its rating for Romanian at Baa3, it revised the outlook upwards to stable, from negative in April
2014. The revisions to Romanias credit rating have been prompted by its commitment to fiscal consolidation;
improved external balances and external debt position; and financial stability backed by the deleveraging of
banks.
Chart 7

Public Debt vs. General Government Budget Deficit in Romania: 2008-2013

% of total GDP

Source:

Euromonitor International from National Statistics Offices/Eurostat/International Monetary Fund/OECD

FINANCIAL STABILITY
Banking sector is stable but asset quality remains weak
Financial stability remained robust even in a challenging macroeconomic environment. According to the 2013
Financial Stability Report of the National Bank of Romania (NBR), Romanias central bank, the banking system was
supported by adequate solvency, provisioning and liquidity levels. The banking sector solvency test - spanning the

third quarter of 2013 to the second quarter of 2015 showed that credit institutions remained resilient to adverse
macroeconomic shocks.
In 2013, bank claims on the private sector rose by 5.7% (year-on-year) in real terms, to RON253 billion
(US$76.1 billion), reflecting a rise in borrowing-lending activity. While lending to the private corporate sector
for the production of high value-added goods has been strong, increased household indebtedness and nonperformance thereof has caused banks to deleverage in private households lending.
Romanias banks pursued generous lending practices prior to the global financial crisis of 2008. As the
countrys economic downturn intensified, bad debts rose sharply, causing Romanias bank asset quality to
deteriorate significantly. The ratio of bank non-performing loans to total gross loans rose steadily from 2.8% in
2008 to 17.7% in 2013. In 2013, Romania had the third weakest bank asset quality in Eastern Europe, after
Serbia (18.8%) and Montenegro (17.9%).
Chart 8

Romanias Bank Nonperforming Loans to Total Gross Loans: 2008-2013

Source:

Euromonitor International from World Bank

The deregulation of electricity and gas prices coupled with higher excise duties and price rises on imported
commodities kept inflation high during the first half of 2013. Food prices on the other hand, moderated on the back
of a bumper harvest, providing some comfort to price pressures.
Annual inflation stood at 4.2% in 2013. Inflation charted a downward trend during 2013, from 6.0% in January
2013 to 1.9% in December 2013. The NBR has a target inflation range of 1.5% to 3.5% in 2014 and 2015.
Accordingly, inflation is forecast at 2.4% in 2014.
Moderating inflation provided sufficient legroom for monetary easing. The NBR cut benchmark interest rates by
0.25% in September 2013 (to 4.3%) and again in January 2014 (to 3.8%) with an aim to stimulate growth.
Accordingly, the long-term interest rate dipped from 6.7% in 2012 to 5.4% in 2013 and annual lending rates
declined from 11.3% in 2012 to 10.5% in 2013, thereby boosting investment and borrowing that is essential for
growth.
The Romanian economy was supported by adequate liquidity. Total money supply amounted to RON100 billion
(US$30.1 billion) in 2013, growing by 12.7% (year-on-year) in nominal terms in the same year.
Chart 9

Inflation in Romania: 2008-2013

Source:

Euromonitor International from national statistics/Eurostat/OECD/UN/IMF

REAL ESTATE
Housing market remains depressed
Romanias housing market continued to register depressed prices for the fifth consecutive year. The construction
sector also contracted, with GVA from construction declining by -4.4% (year-on-year) in real terms in 2013. The
construction sector accounted for 9.0% of total GVA and 7.1% of total employed population in 2013. Non-delivery
of economic and political reforms and corruption adversely impact investor sentiment in the sector. In line with
austerity and fiscal consolidation, government investment in capital projects also dipped. The share of gross fixed
capital formation (encompassing infrastructure activity) in total GDP declined from 26.3% in 2012 to 23.6% in
2013.
Chart 10

Real Growth in GVA from Construction and Real GDP Growth in Romania: 2008-2013

annual change (%)

Source:

Euromonitor International from International Monetary Fund (IMF), International Financial Statistics and World
Economic Outlook/UN/national statistics

The average selling price of apartments fell by -5.9% in nominal terms during the period January 2013 August
2013 to 910 per square meter, with the capital city Bucharest registering the largest dip of -6.6% to 1,054 per
square meter during the same period, according to the Global Property Guide.
According to the Global Property Guide citing the National Institute of Statistics, the total number of residential
building permits also fell by 7.6% (year-on-year) to 3,564 units in June 2013.
According to Global Property Guide, Romanias house price-income ratio stood at 35.6x in 2013, lower than
Turkey (35.8x) and Ukraine (102x) but higher than most other European countries, such as Italy (22.2x) and
Luxembourg (6.0x).
Chart 11

Source:

Romanias Housing Completions: 2008-2013

Euromonitor International from national statistics

ENERGY & ENVIRONMENT

Efforts to increase use of renewable energy
With 600 million barrels of proven oil reserves as of January 2013, Romania has the fourth largest crude oil reserves
in Europe. The country also recorded one of the largest refining capacities of Eastern Europe at 467,642 barrels per
day, as of August 2013. However, Romanias oil refinery sector operated below capacity, with annual refinery
output touching 9.7 million tonnes in 2013. The country imported Mineral Fuels worth US$8.9 billion, or 12.1% of
total imports in 2013, and does not appear excessively dependent on imports to meet domestic energy requirements.
In 2013, Romanias total primary energy consumption stood at 32.6 million tonnes of oil equivalent (mtoe), down
from 38.5 mtoe in 2008. On a per capita basis, Romania recorded the lowest total primary energy consumption of 1.6
tonnes of oil equivalent in Eastern European in 2013.
The country has a diversified energy consumption pattern natural gas accounted for 36.2% of total primary
energy consumption in 2013, followed by Crude Oil (26.7%) and Coal (20.2%). Romania is further looking to
develop its shale gas industry and reduce dependence on Russian gas supplies.
In 2013, Romania recorded installed production capacity of more than 2,000 megawatts of various renewable
energy sources and is on track to attaining the EU target of renewable energy sources accounting for 20.0% total
energy needs by 2020. In June 2013 however, the Romanian Energy Regulatory Authority (ANRE) suddenly
announced a withdrawal in certificate issuances for future renewable energy projects until 2017, causing major
panic amongst foreign investors.
Chart 12

Romanias Primary Energy Consumption: 2013

Source:

Euromonitor International from BP Statistical Review of World Energy

Romania is affected by floods, extreme temperatures and earthquakes. According to EM-DAT, extreme temperatures
in 2012 killed 86 persons, while floods in 2013 killed 9 persons. The economic damage costs of these recent natural
disasters have not been significant, suggesting that business operations are not at high risk, however daily life may
be affected.
In 2013, Romania recorded CO2 emissions of 80.5 million tonnes, the fifth highest in Eastern Europe, but was lower
than 2008 levels of 93.9 million tonnes.
CO2 emissions per unit of output stood at 426 grams per US$ in 2013, lower than the 460 grams per US$ in
2008. Similarly, the energy efficiency of the country improved from US$5,308 per tonne of energy consumed in
2008 to the US$5,800 per tonne of energy consumed in 2013.
As part of the EU, Romania aims to reduce greenhouse gas emissions by 20.0% compared to 1990 levels by 2020.
Chart 13

Romanias CO2 Emissions vs. Energy Efficiency: 2008-2013

000 tonnes, US$ per tonne

Source:
Note:

Energy Information Administration of the US Government, International Energy Annual

CO2 Emissions encompass the consumption and flaring of fossil fuels

DEFINITIONS
Corruption Perceptions Index relates to perceptions of the degree of corruption as seen by business people and
country analysts.
Foreign Direct Investment (FDI) is investment made to acquire a lasting interest in or effective control over an
enterprise operating outside of the economy of the investor.
FDI Inflows are the net value of inward direct investment made by non-resident investors in the reporting economy,
including reinvested earnings and intra-company loans, net of repatriation of capital and repayment of loans.
FDI Intensity measures FDI inflows as percentage of total Gross Domestic Product (GDP).
Gross Value Added (GVA) is a measure of the contribution to total Gross Domestic Product (GDP) made by an
individual producer, industry or sector, and represents the value of output less the value of intermediate
consumption. It is calculated without making deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources.
House Price-Income Ratio is the ratio of the cost of a typical upscale housing unit of 100 square metres compared to
the countrys GDP per capita.
Net Migration Rate is the difference between the number of persons entering and leaving a country during the year
per 1,000 persons.
Old-Age Dependency Ratio is the percentage of the population aged 65+ (retired) per population aged 15-64 (of
working age).
Openness of the Economy is reflected by exports as a percentage of total GDP. More than 50.0% is very open;
25.0%-49.0% is open; 6.0%-24.0% is relatively open; and 0%-5.0% is relatively closed, high barriers to trade.
Political Stability and Absence of Violence Index reflects a better score in a higher position and measures the
perceptions of the likelihood that the government will be destabilised or overthrown by unconstitutional or violent
means (including domestic violence and terrorism).
Unemployment Rate represents unemployed population as a percentage of the economically active population, also
known as the labour force (the total number of people employed plus unemployed).
Voice and Accountability Index captures perceptions of the extent to which a country's citizens are able to
participate in selecting their government, as well as freedom of expression, freedom of association, and a free media.
A high ranking reflects a high score in the index.
Youth Unemployment Rate refers to the unemployed population aged 15-24 as a percentage of economically active
population aged 15-24.