Romania Macroeconomic Situation

September 2013
Valentyn Povroznyuk, Radu Mihai Balan, Edilberto L. Segura
Industrial production grew by 5.0% yoy in June 2013. The consolidated budget deficit declined to 0.96% of GDP at the end of July 2013. Consumer inflation decelerated to 4.4% in July 2013. The foreign trade deficit declined 11 times yoy to EUR 315 million in January-June 2013. The current account balance remained positive and increased to EUR 695 million by the end of June 2013.
Executive Summary GDP expanded 1.8% yoy over the first half of the year, 1.1% was ensured by industrial production growth. In June 2013, external demand continued to be the main stimulus of real sector development. Manufacturing was the main driver behind a 5.0% yoy increase in industrial production this month. Increases in the volume of receipts from accommodation and food services helped to generate increases in the total volume of rendered services for the first time in five months, and to decelerate the decline in the trade and services sector in general. The consolidated general budget deficit inched down from 1.1% in January-June 2013 to 0.96% in January-July 2013. The January-July fiscal budget deficit was 0.23% yoy lower than the corresponding deficit last year. inflation because of the high share of food products in the consumer basket. The National Bank of Romania continued pursuing its goal of ensuring control over inflation, revival of national currency lending, and cushioning adverse internal and external effects on economic recovery. Therefore, it further decreased the policy rate to 4.5% from August 6th and continued implementing prudent monetary policy. At the same time, the policy rate cut transfers rather slowly to interest rates on national currency loans. Therefore, policy measures introduced by the NBR have shown little progress so far.

In January-July 2013, the foreign trade deficit was 11 times lower than that over the same period last year. At the end of June, it was equal to EUR 315 million. In July 2013, consumer inflation declined to 4.4%, Surplus of the current transfers account covered both compared to 5.4% in June. It is projected to decline to 3.1% the foreign trade deficit and income account deficit and by the end of the year. This years good harvest is pushing generated a current account surplus of EUR 695 million food prices down. This has led to deceleration of consumer in January-June 2013.

GDP growth, % yoy GDP per capita, USD Industrial production, % yoy Retail sales, % yoy Budget balance, % GDP Government external debt, % GDP Inflation, eop Gross international reserves, EUR billion Current account balance, % GDP Gross external debt, % GDP Unemployment (ILO methodology), % eop Exchange rate RON/EUR, annual average

2008 2009 7.1 -6.6 9,497 7,649 0.9 -5.5 13.0 -10.3 -4.9 -7.3 13.4 23.6 6.3 4.7 28.3 30.9 -11.6 -4.2 51.8 68.7 5.8 6.9 3.68 4.24

2010 2011 2012 2013 -1.6 2.5 0.2 1.9 7,667 8,863 8,030 8,080 5.5 5.6 0.0 7.0 -5.3 -2.5 2.9 3.5 -6.4 -4.3 -2.5 -2.2 30.5 34.7 37.8 38.0 8.0 3.1 5.0 3.1 36.0 37.3 36.4 37.0 -4.4 -4.5 -4.0 -3.6 74.4 75.2 75.1 75.0 7.3 7.4 7.2 7.0 4.21 4.24 4.45 4.5

Economic Growth
Romanian economy continued to perform well in Q2 2013 which led to higher than GDP growth, % yoy 6,0 Ukrainian Industry and Exports of of Goods, and year World in general. The Q2 2013 growth expected growth Steel from the beginning the Price Index, % yoy 4,0 50% 20% was 1.5% compared with the same quarter of last year and 0.5% compared with 40% 16% 2,0 30% 12% II III IV I II III IV the previous quarter (seasonally adjusted figures). At the same time, during the first 0,0 8% 20% I II III IV I II III IV I II 4% 10% -2,0 half of the year, 0% the GDP increased by 1.8% yoy, according to the updated data of 0% -4,0 -10% -4% statistical office. -20% In terms of GDP resources, industrial production made the highest -8% -6,0 2010 2011 2012 13 contribution to this growth at 1.1%. However, within the structure of GDP, its growth -8,0 World Carbon Steel Price Index, left scale 2009 2012 2010 2011 2013 -10,0 Industrial Production, 3m MA, right scale of agriculture at 6.1% yoy. Such a high was the second best at 3.9% yoy after growth Export of goods, 3m MA, left scale Source: INSSE Source: MEPS, NBU, The Bleyzer Foundation growth in agriculture is the result of very good harvest this year compared with very bad one last year. In terms of GDP uses, final consumption inched down by 0.1% yoy, gross capital formation declined by 15.3% yoy, while export of goods and services increased by 10.7% yoy. Industrial production by selected branches
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Edilberto L. Segura 7 Rina Bleyzer OMalley 2

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Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

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Steel Price Index, % yoy

2010

2011

2012

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4,0 2,0 0,0 -2,0 -4,0 -6,0 -8,0 II III IV I II III IV I II III IV I II III IV I II

Source: MEPS, NBU, The Bleyzer Foundation

September 2013

World Carbon Steel Price Index, left scale Industrial Production, 3m MA, right scale Export of goods, 3m MA, left scale

Romania Macroeconomic Situation

-10,0 2009
Source: INSSE

2010

2011

2012

2013

In January-June 2013, growth of industrial production remained almost Industrial production by selected branches unchanged at 6.0% yoy thanks to the sectors good performance in June. In 80 80 60 particular, industrial production was back to growth in year-over-year terms 40 60 this month after one month of decline. A 6.0% yoy increase in manufacturing 20 40 0 led to a 5.0% yoy increase in the industrial sector in general, as a 3.6% yoy -20 20 growth of mining and quarrying almost fully compensated for a 4.2% decline -40 in0 energy supply. The highest growth was observed in manufacture of coke -60 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun -20 2012 2013 and refined petroleum products in June. However, the 55.6% yoy increase was Industry, right scale Food products -40 Coke and refined petroleum products Chemicals and chemical products mainly the result of a low base effect, as one of the sectors leaders underwent Basic metals Motor vehicles, trailers, -60 and semi-trailers an overhaul in June 2012. Production of transport means, production of -80 Source: INSSE chemicals and chemical products, and food industry also posted very good 2009 2010 2011 2012 2013 performance, growing by 17.8% yoy, 17.7% yoy, and 8.3% yoy respectively World Carbon Steel Price Index Consolidated budget balance World in Fertilizer Price Index in June. Growth transportation means manufacturing is of a special relevance, since this sector growth is mainly driven % of GDP 0,5 by external demand. The number of automobiles produced and assembled in Romania increased by 44.7% yoy over H1 Source: MEPS 0 2013, reaching 225,759 cars. 84% of these cars were exported. This year, Romania might become the 9th largest auto -0,5 producer in the EU, moving ahead of Italy, which produced 397 thousand cars in 2012. To summarize, external demand -1 remained the major factor of growth in industrial production in Romania, as the-1,5 highest growth rates were observed in industries which are export-oriented (food industry is oriented to both external and internal markets). -2
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-2,5 The trade and services sector continues to show declines in activity, but posted some progress in June 2013. In particular, -3 Jan trade Feb Marcomponent Apr May Jun Jul and Aug Sep Oct Nov Dec in its decline decelerated to 4.0% yoy thanks to further slowdown in the decrease of the a rebound 2012 2013 the services component. The start of the car fleet renewal programme improved the situation of auto sales (the decline Source: Ministry of Public Finance of Romania decelerated from 19.3% yoy in May to 12.8% yoy in June). Trade with spare parts and accessories for motor vehicles GDP growth, % yoy was the only components of and trade with motor vehicles that registered growth in June in 6,0 yoy terms. And its growth was Ukrainian Industry Exports of Goods, and World Steel Price Index, % yoy 4,0 50% 20% high enough to compensate for most of the declines in other components. As a result, the total decline in trade with motor 40% 16% 2,0 30% 12% II III IV I II III IV % yoy Inflation indexes, growth vehicles totalled 5.8% yoy in June, just half of the decline a month ago. Sales of other durables continued to decline but 0,0 8% 20% 8 I II III IV I II III IV I II 4% 10% yoy in June compared to 2.5% -2,0 at lower rates (0.7% yoy in May) possibly due to an increase in sales of small household 0% 0% 7 -4,0 -10% -4% appliances and communication devices. Improvement in sales of cars and the harvest campaign led to some deceleration 6 -20% -8% -6,0 2010fuel sales. 2011 As for 2012 13 5 in decline of volume of services rendered to households, their dynamics -8,0 returned to positive territory in World Carbon Steel Price Index, left scale 2009 2012 2010 2011 2013 4 -10,0 Industrial Production, 3m MA, right scale June 2013 after five consecutive months of decline. The growth was not very high at 0.7% yoy, and was generated thanks Export of goods, 3m MA, left scale 3 Source: INSSE Source: MEPS, NBU, The Bleyzer Foundation to growth of receipts from hotels and restaurants, and accommodation and food service activities. At the same time, retail 2 1 trade declined by 4.2% yoy in June and by 1.1% yoy for the first half of 2013. In June, the deepest decline was registered 0 in fuel sales at 9.7% yoy. Food, beverages, and tobacco sales lost 3.8% yoy, while non-food down 0.7% yoy. production by selected branches Jul Industrial Aug Sep inched Oct Nov Dec Jan Feb by Mar Apr May June July

Fiscal Policy

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In July 2013, the Romanian government further improved execution of the consolidated general budget. Thanks to the 0 budget adjustment program, the consolidated general budget deficit of EUR 1.37 billion was 13.6% yoy lower in January-20 2012 2013 July 2013. As a share of GDP, the consolidated general budget deficit amounted to 0.96% the period,growth which Selected over monetary indicators, % yoyis 0.2% -40 12 lower than the deficit over the same period of the previous year. -60
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2013
Foods Non-foods

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Services
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Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Industry, right scale Coke and refined petroleum products Basic metals

In January-July 2013,2009 consolidated budget revenues grew by 5.2% yoy to 8 EUR 26.44 billion (18.5% of GDP) 2010 2011general 2012 2013 6 World Carbon Steel Price Index over the reporting period thanks to growth in revenues from all major taxes. This is 4 Consolidated budget balance World Fertilizer Price Index % of GDP 1.1% faster than growth Source: MEPS of total government expenditures. Return of budget sector 2 0,5 0 0 wages to their pre-crisis level and increase of the minimum wage in February 2013 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul -2 -0,5 2012 2013 both continued to boost personal income tax revenues as they grew by 8.7% yoy -4 -1 in January-July 2013. Receipts from dividends and use taxes on goods generated -6 -1,5 Money supply Non-government credit -2 Non-government deposits an additional EUR 0.52 billion during the reporting period mainly thanks to -2,5 NBR collection of license fees for rights to use radio frequencies. At the same time, local Source: -3 governments managed to generate a 9.5% yoy increase in property tax revenues and 2012 2013 Source: Ministry of Public Finance of Romania an 8.2% yoy increase in non-tax revenues. Payments from the EU grew by 26.9% Monthly foreign trade balance
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

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Food products Chemicals and chemical products Motor vehicles, trailers, and semi-trailers

Source: INSSE

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40 35 30 25 Bucharest Office, Romania 20 Inflation indexes, growth % yoy 12Bis, Draghiescu St., Sect. 5, 15Dr. 8 10 Bucharest 7 , 050579 5 6 0 (21) Tel: +40 4101000 Fax: +40 (21) 4102222 -5 5 Email: -10 bucharest.office@sigmableyzer.com 4 -15
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Balance, EUR bln. (right scale)

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Imports, % yoy (left scale)

8%20% 20% 50% 4%16% 10% 40% 0% 30% 0%12% -10% 20% -4% 8% -20% 10% -8% 4% 0% 2010 0% 2011 2012 13 -10% World Carbon Steel Price Index, left scale -4% -20% Industrial Production, 3m MA, right scale -8% Export MA, left scale 2012 2010of goods, 3m2011 13 Source: MEPS, NBU, The Carbon Bleyzer Steel Foundation World Price Index, left scale

Industrial Production, 3m MA, right scale Export of goods, 3m MA, left scale

Source: MEPS, NBU, The Bleyzer Foundation

Romania Macroeconomic Situation

-8,0 -4,0 -10,0 -6,0 2009
-8,0 Source: INSSE 2009 -10,0
Source: INSSE

0,0 4,0 I II III IV I II III IV I II -2,0 2,0 II III IV I II III IV -4,0 0,0 I II III IV I II III IV I II -6,0 -2,0 2010
2010

2011
2011

2012
2012

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2013

September 2013
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Industrial production by selected branches

80 60 Industrial production by selected branches 40 80 20 60 0 40 -20 20 -40 0 -60 -20
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60 a result, in January-July 2013 their total amount became almost equal to the amount observed over the same in July. As 80 40 period last year. 60
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0 The government managed to limit growth of its total expenditures to 4.1% despite significant increases in the wage bill Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 20 -40 -20 2012 2013 and expenditures on goods and services by reducing capical investments over the reporting period. The wage bill grew 0 -60 Jun Julright Augscale Apr May Jun Sep Oct Nov Dec Jan Feb Industry, FoodMar products -40 Coke and refined petroleum products Chemicals and chemical products -20 due to the mentioned return of the budget sector wages to their pre-crisis by 16.4% yoy level. Expenditures on goods and 2012 2013 Basic metals Motor vehicles, trailers, -60 and semi-trailers Industry, right scale Food products -40 services-80 expanded by 7.4% yoy due to payments to the National Health Fund and accelerated repayment of arrears on the Coke and refined petroleum products Chemicals and chemical products Basic metals Motor vehicles, trailers, -60 Source: INSSE and semi-trailers side of local authorities. Investment expenditures were cut by 13.9% yoy to EUR 3.4 bln. 2009 2010 2011 2012 2013
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2009 Monetary Policy

% GDP The good harvest helped to decrease consumer inflation in July 2013. Growth of food decelerated to 3.9% yoy in 0 ofprices 0,5 Source: MEPS -0,5 July compared to 5.8% yoy observed in the previous month. This immediately lowered total consumer inflation to 4.4% 0 -1 -0,5 from 5.4% observed a month ago because of the high share of foods in the consumer basket. Growth of prices of non-food -1,5 -1 goods and services also decelerated. Furthermore, CORE2 inflation still remained below CPI at 2.8% in July 2013. This -2 -1,5 means that the downward trend in consumer prices will continue in the coming months. -2,5 -2

Source: MEPS

World Carbon Steel Price Index World Fertilizer Price Index 2012 2010 2011 World Carbon Steel Price Index World Fertilizer Price Index

Source: INSSE

2013

Consolidated budget balance

% of GDP 0,5 Consolidated budget balance

-2,5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Low inflation expectations and little progress in national currency lending recovery prompted the NBR to lower the -3 2012 Jan rate Feb Mar Apr May Jun 2013 Jul Aug Sep Nov Dec monetary policy rate for the second month in a row. Starting from August 6th, the policy was decreased by Oct 50 basis Source: Ministry of Public Finance of Romania 2012 2013 points to 4.5%. The inflation forecast for the third quarter predicts faster disinflation in the period along with a pick-up in Source: Ministry of Public Finance of Romania economic growth. In addition, interbank money market rates and yields on government bonds have recently been close to or below the policy rate. This means consolidation of the monetary policy impulse transmission. In addition, the data indexes, growth % yoy assured the NBR that its current monetary policy is likely to encourage recovery Inflation 8 Inflation indexes, growth % yoy of national currency lending in the private sector. Therefore, the bank has decided 7 8 7 to continue pursuing adequate liquidity management in the banking system and to 6 56 leave the existing levels of minimum reserve requirement ratios on liabilities of 4 5 34 credit institutions unchanged.

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However, the policy rate cut rather slowly transfers to interest rates on new corporate and household loans in domestic currency. This was accompanied by continued curtailing of borrowing activities in national and especially in foreign currency on the side of households in January-July 2013. Therefore, total growth in volume of RONdenominated loans decelerated to 0.7% yoy over the reporting period. This increase was too low to compensate for the accelerated decline in forex-denominated loans. The total volume of forex-denominated loans was equal to 7.2% yoy because of an almost 10% yoy decline in corporate loans in January-July 2013. As a result, the total volume of non-government loans declined by 4.4% yoy in January-July 2013. Growth of broad money (M3) decelerated in July 2013. As of 31st July, M3 grew by 2.0% yoy, which is 3.0% lower than growth over the first six months of the year. This deceleration is a result of a slow down in growth of net foreign assets to 74.9% yoy and acceleration of the decline in net national assets to 10.6% yoy at the end of July (95.0% yoy increase and 7.0% yoy decline at the end of June, respectively).

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12 01 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May June July Jul Aug Sep2012 Oct Nov Dec Jan Feb Mar Apr May June July 2013 2012 2013 Services CPI PPI Foods Non-foods
CPI Source: INSSE Source: INSSE PPI Foods Non-foods Services

Non-government deposits Non-government deposits Stronger volatility in investors risk appetite and persistence of uncertainties Source: NBR Source: NBR surrounding economic activity in Europe and elsewhere both temporarily entailed wider fluctuations in RON exchange rate. In particular, the RON/EUR exchange rate appreciated from 4.4588 observed Monthly Monthly foreigntrade trade balance at the end of June 2013 to 4.4048 as of July 31st. At the same time, the NBR initiative to foreign lower thebalance policy rate for the 0,4 40 0,4 40 35 35 on August 7th, 2013. The NBR 0,2 second month in a row led to the largest depreciation in the RON over the last seven weeks 0,2 30 30 0 25 0 25 lowered the policy rate by 0.5%, which was twice as high as expected. Therefore, market players started to price in more 20 20 -0,2 -0,2 1515 rate cuts on the back of lower forecasted inflation. As a result, the RON/EUR exchange 10 rate depreciated by 0.9% to 4.4446 -0,4 10 -0,4 55 -0,6 00 by the end of trading on August 7th, 2013. -5 -5 -0,8

Selected monetary indicators, growth % yoy 12 Selected monetary indicators, growth % yoy 12 10 10 8 8 6 6 4 4 2 2 0 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul -2 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul -2 2012 2013 -4 2012 2013 -4 -6 -6 Money supply Non-government credit
Money supply Non-government credit

International Trade and Capital

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Jun Sep Jun Jul Jul Aug Aug Sep Oct OctNov NovDec Dec Jan Jan Feb Feb Mar Mar Apr Apr May May Jun Jun

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Balance, EUR bln. Balance, EUR bln. (right scale) (right scale)

2013 2013
Imports,% %yoy yoy(left (leftscale) scale) Imports, Exports,% %yoy yoy(left (leftscale) scale) Exports,

Bucharest Office, Romania Source: NBR Source: NBR 12Bis, Dr. Draghiescu St., Sect. 5, Bucharest , 050579 Tel: +40 (21) 4101000 Fax: +40 (21) 4102222 Current account componentsand andFDI, FDI, EUR EURbillion billion Email: bucharest.office@sigmableyzer.com Current account components
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Romania Macroeconomic Situation

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Money supply
Money supply

September 2013
Fast growth in foreign trade in services was the major factor for the improvement in Romanias foreign trade sector over the first half of 2013. Exports of services grew by 32.4% yoy to EUR 4.703 billion (FOB-FOB), while imports remained almost unchanged at EUR 3.547 billion (inched down by 0.8% yoy). Transport services posted the best performance as they generated EUR 1 billion of trade surplus, while trade in tourism and travel services continued to gradually deteriorate. Foreign trade in goods further improved in January-June 2013. Exports of goods grew by 5.9% yoy over the period, which is almost the same as the increase in January-May 2013. At the same time, imports of goods declined by 2.7% yoy over the reporting period compared to 1.9% yoy in January-May 2013. The high surplus of trade in services compensated for a significant part of the deficit of foreign trade in goods. Therefore, in January-June 2013 the total foreign trade deficit was 11 times lower year-overyear at EUR 315 million. In January-June 2013, the current account surplus of Romania was EUR 381 million higher compared to that in January-May 2013. The increase was generated thanks to the mentioned improvements in foreign trade and growth in surplus of the current transfers account. Surplus of current transfers grew by one fifth in one month and almost reached the level observed in January-June 2012. On the other hand, the income account remained in deficit. Moreover, its deficit grew by 16.0% yoy to EUR 904 million. Overall, the current account surplus totalled EUR 695 million over the reporting period.

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2013
Non-government credit Non-government deposits

Non-government credit Non-government deposits

Source: NBR
Source: NBR

Monthly foreign trade balance 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 -5 -5 -10 10 -15 -15

2012 2012
Balance, EUR bln. Balance, EUR bln. (right (rightscale) scale)

Monthly foreign trade balance

Jun Jul Aug Aug Sep Sep Oct OctNov Nov Dec Jan Feb Jun Jul Dec Jan Feb MarMar Apr Apr May May Jun Jun

0,4 0,2 0,2 0 0 -0,2 -0,2 -0,4 -0,4 -0,6 -0,6 -0,8 -0,8 -1 -1

0,4

2013 2013
Imports, % yoy (left(left scale) Imports, % yoy scale) Exports, % yoy (left(left scale) Exports, % yoy scale)

Source: NBR Source: NBR

2 2,5 1,5 2 1 1,5 0,5 1 0 0,5 -0,5 0 -1 -0,5 -1,5 -1 -2 -1,5 -2

Current account components and FDI, EUR billion 2,5

Current account components and FDI, EUR billion

June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

June July Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun 2012 2013

Trade in goods balance (left scale) Current account balance (right scale) Incomes balance (left scale) Current Source: NBR,account INSSE balance (right scale)

2012 (left scale) Trade in goods balance Incomes balance (left scale)

2013 Trade in services balance (left scale) Current transfers balance (left scale) Trade in services balance (left scale) FDI (right scale)

Current transfers balance (left scale) FDI (right scale)

Source: NBR, INSSE

During June 2013, Romanias total external debt declined by 1.13% mom thanks to decreases in both long- and medium term external debt and short-term external debt. In particular, long- and medium-term external debt inched down by 0.73% mom to EUR 78.918 billion. Short-term external debt decreased by 2.69% mom to EUR 19.917 billion. The share of longand medium-term external debt remained almost unchanged at 79.85% of the total external debt of the country as of June 31st. Foreign exchange reserves significantly increased during July 2013. As of July 31st, they stood at EUR 33.353 billion, which is 3.2% higher than a month ago. The National Bank of Romania managed to triple its foreign exchange reserve inflows to EUR 1.833 billion compared to June. At the same time, foreign exchange reserve outflows decreased by almost 25% to EUR 787 million during July. The gold stock once again remained unchanged in terms of weight at 103.7 tonnes. However, its value grew by almost 9% to EUR 3.344 billion thanks to changes in the international price of gold. Total international reserves totalled EUR 36.697 billion at the end of July, which is a 3.7% mom increase. However, we expect them to decrease as Romania is obligated to pay EUR 1.637 billion on public and publicly guaranteed foreign currency denominated debt during August. This is 10 times more than payments the country made in July.

Other Developments Affecting the Investment Climate

Initial Public Offer (IPO) of Nuclearelectrica, Romanias nuclear electricity producer, was announced for September 2013. Nuclearelectricas IPO was agreed with the IMF, same as IPO of several other companies, yet plans have been repeatedly delayed. The company operates Romanias two nuclear reactors which produced 20% of countrys electricity in 2012. According to the IPO prospect, 10% of the share capital will be offered to investors, out of which an 85% tranche will be offered to Institutional Investors.

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Headquarters 123 N. Post Oak Ln., Suite 410 Houston, TX 77024 USA Tel: +1 (713) 6213111 Fax: +1 (713) 6214666 Email: sbleyzer@sigmableyzer.com

Bucharest Office, Romania 12Bis, Dr. Draghiescu St., Sect. 5, Bucharest , 050579 Tel: +40 (21) 4101000 Fax: +40 (21) 4102222 Email: bucharest.office@sigmableyzer.com