Weekly Briefing, Vol. 46. No. 2 (RO) December 2021
Economy in 2021: navigating between deficits and plans for recovery
Romania entered 2021 with several macroeconomic imbalances intended to be corrected, but it partially managed to do so. The forecast on the economic growth improved during the year, and now a 7% growth of the GDP is expected for this year. However, the current account deficit worsened and a new problem appeared: high inflation. While the budget deficit was kept under control, Romania has to implement the necessary set of reforms for benefiting of the European Union’s (EU) money provided through the National Recovery and Resilience Plan (NRRP). Among them, there is the reform of state-owned enterprises and the transition to the green economy, issues that started to be tackled from the beginning of this year.
There were important fears regarding the volatility of the economic growth, which was forecasted between 1.4% to 4.9% at the beginning of the year by both domestic and foreign institutions. The economic situation improved during the year. Most of the economic indicators were restored at the pre-crisis level, on the background of several unrepeatable conditions, given the negative economic effects of the pandemic and the subsequent restrictions in force last year. Therefore, the actual economic projections continue to keep the GDP growth rate at around 7% for 2021, given the good evolutions in the sectors of agriculture and services. On the other hand, the industry and the construction sectors did not manage to consistently resume the growth. The latest data show that the GDP increased by 7.2% in the first nine months of this year, but with a continuous slowdown in the last quarters. However, experts consider that the uncertainty about the evolution of future macroeconomic aggregates is growing, as several problems which were highlighted at the beginning of the year and in need to be solved are persisting.
Fiscal consolidation was another target for this year, which was only partially fulfilled. Romania is struggling with a large current account deficit, which is continuously growing, and the need to reduce the budget deficit. Therefore, the forecasts for the deficit of the current account worsened during the year. Projections moved from a deficit of 5.5% of GDP initially to 6.3% at present, after the current account hitted a deficit of 4.8% of GDP in the first nine months of 2021 and became 47% higher than the level in the same period of 2020. The deficit threshold set at European level for ensuring macrostability is 4% of GDP. The size of the external deficit is one of the highest historically both in Romania and at the European level, due to the savings-investment gap in the public sector, according to the opinion issued by the Fiscal Council. The trade deficit continues to have a negative impact, given the more rapid growth of imports than exports. Romania’s trade deficit in goods increased to EUR 19 billion in the first 10 months of 2021, which is 30% higher than in the same period in 2020.
For the budget deficit, the situation was better kept under control. Romania’s budget deficit exceeded 4% of GDP after the first 10 months of this year, up from the 3.77% deficit reported at the end of September, but significantly lower than last year, in the midst of a pandemic, which amounted to 7.01% of GDP at the end of October 2021. This evolution was determined by the increase of the budget revenues given the advance of the revenues from Value Added Tax (VAT) sources and the reduction of expenditures due to the decrease in wages and social assistance as a share of GDP.
A new problem appeared, however, due to the fact that the rapid economic recovery, which was partially generated by a postoned demand, caused a rapid increase in inflation not only in Romania, but also in Europe. However, in Romania, the inflationary pressures were also accompanied by significant increases in the prices of electricity and fuel, which caused an annual inflation rate of 7.9% per year in October 2021and an average inflation rate of 4.1% in the last 12 months. Therefore, even if the net wages increased by 6% in October, according to the data of the National Institute for Statistics, the high inflation cancelled any positive effect, as the increase was not felt by the population.
Several other problems had to be dealt with, such as the situation of the state-owned enterprises and the need to ensure the transition to a green economy. Some of the state-owned enterprises were meant to enter an ample process of reform, given the deterioration of their economic-financial results in the last years. As a result, all state-owned companies having debts or losses were required to carry out a restructuring plan for restoring their profitability, otherwise cutting off the budget subsidies for them. The Government measures also targeted the intention to sell shares of these enterprises’ portfolio and to design a proper calendar envisaging the stock exchange listing of state-owned companies in the next four years. The measures are considered, but further steps have to be made for ensuring their implementation.
Romania also had to consider measures for ensuring the transition to the green economy, following EU’s plan to reduce greenhouse gas emissions. The abandonment of polluting industries is a difficult measure, since the national coal industry is still vital to the country’s energy security and has a large impact on the labour market. Several programmes targeting the improvement of the environment were developed with state’s support, while other strategic measures remained on the background, given the turbulences on the political arena. Romania’s position inside the EU is that of supporting the use of gas for ensuring a smooth transition, which will allow the integration of new capacities from renewable sources, further used for hydrogen production. The Ministry of Energy aims to implement the national hydrogen strategy within a year, which is going to be financed through the funds provided by the NRRP. The Government also indicates that several new programs providing state guarantee will be initiated, being dedicated to the transition to green energy. In the meantime, the latest increases in the prices for electricity and fuels raised worries on ensuring a proper provision of gas and electricity to consumers, but also on their capacity of paying the increased bills.
The bankruptcy of the largest insurance company also hit the economy at the end of September, when the Financial Supervisory Authority decided to withdraw the operating license from City Insurance. The company had almost 3 million policyholders and was the market leader for the mandatory car (RCA) insurance policies for liability. It is the third bankruptcy of an insurance company with high activity on the RCA market in the last years, signalling the problems in this area. In fact, City Insurance managed to sell RCA policies at rates below the maximums set by the Government, therefore the company’ market share increased significantly, while managing to escape the intended recovery plan. As a result, the company failed in dealing with the compensation of damages and a proper investigation revealed that it had a solvency below the minimum required by the rules. While the clients will be compensated by the guarantee fund, the real fear is that the RCA market will be completely out of control. The prices for the RCA policies have already significantly increased.
One of the good news during the year was the completion of the NRRP, which was also approved by the European Commission (EC), despite the political crisis in Romania. NRRP in Romania is structured on 6 pillars and divided into 15 components, for covering the needs of the country and simultaneously pursue the EC’s priorities in the areas of green transition, digital transformation, smart growth, social and territorial cohesion, health, social and institutional resilience, policies for the next generation, children and young people. Romania will benefit from a EUR 29.2 billion funding from the Recovery and Resilience Mechanism dedicated to reforms and investments included in the NRRP. The amount is divided into a grant worth EUR 14.24 billion and a financing facility amounting to EUR 14.94 billion, granted on advantageous terms, at the level of the EC’s costs. Romania has recently received a first tranche amounting to EUR 1.85 billion. Accessing the European money depend on meeting the conditionalities in the program. For 2021 and the first quarter of 2022, 45 targets or milestones are planned, of which 5 are already met, and the rest are underway.
In fact, the EU funding is essential for the recovery of the economy. Experts consider that the use of EU funding, which should replace as much as possible the use of own budgetary resources, is essential for a favourable course of the Romanian economy in the medium and long term. Moreover, since the funds are connected to a comprehensive list of reforms, their use could also positively influence Romania’s image at international level by guaranteeing a proper use of the money, the implementation of solid reforms and the improvement of financial soundness. NRRP could support a higher level of economic activity which could also have positive influence on facilitating the needed fiscal adjustments.