According to the Financial Stability Report December 2019 published by the National Bank of Romania, the aggregate level of systemic risks to financial stability in Romania is on the rise, similarly to global developments, and the outlook for the years ahead shows the furthering of this trend.
As shown in the Report’s overview, current assessments do not signal the presence of severe risks. However, three high systemic risks have been identified, as follows: (i) tensions surrounding domestic macroeconomic equilibria, (ii) weakening in investors’ sentiment towards emerging economies, and (iii) the risk of an uncertain and unpredictable legislative framework in the financial and banking sector. The structure and cost of financing of the current account deficit and budget deficit carry a moderate risk, while the default risk for loans to the private sector is low. For the period ahead, risks are seen increasing overall, except for that of an uncertain and unpredictable legislative framework in the financial and banking sector and the default risk for loans to the private sector, which are expected to remain relatively unchanged.
Similarly to the assessment in the previous Financial Stability Report, the risk of tensions surrounding macroeconomic equilibria has remained elevated. It is the main systemic risk to financial stability in Romania and it is anticipated to rise in the period ahead, amid ongoing pressures from the worsening twin deficits.
The budget deficit stood at 2.8 percent of GDP January through October 2019, up 0.6 percentage points from the same year-ago period. The public wage bill stayed on an upward path (up 20 percent year on year), given the implementation of the unified wage law. Moreover, social transfers rose by 11 percent against the period January-October 2018 and the new pension law will further boost such expenditure via increases in both the pension point and social allowances. Social transfers and the public wage bill would cumulatively account for 85 percent of tax revenues at end-2022 leaving the authorities with little room for maneuver should the business cycle enter a downturn. At the same time, Romania posted the second lowest tax revenues-to-GDP ratio at a European level (27 percent versus the EU average of 40 percent), pointing to ample room for enhancing collection capacity.
Although Romania is subject to the preventive arm of the Stability and Growth Pact, the cash-based budget deficit (national methodology) is estimated at 4.43 percent of GDP for end-2019, and the structural deficit is expected to worsen by 0.8 percentage points from 2018, at odds with the European Commission’s recommendations for a structural adjustment of 1.8 percent of GDP in 2019 and 1 percent of GDP in 20203, before reaching 4.4 percent of GDP in 20204
Also related to macroeconomic stability, the worsening of external imbalance remains a matter of serious concern. The current account deficit as a share of GDP continued to widen at a swift pace compared to the same year-ago period (5 percent in 2019 Q3 from 3.9 percent, four-quarter cumulative data, mainly on the back of a larger trade deficit), Romania being one of the EU Member States with the highest values of this indicator, and the outlook shows a further worsening. An important source of the trade deficit, alongside trade in chemical products and fuels, is the trade in agri-food items, the negative balance of which increased significantly in recent years.
For further information: NBR – Financial Stability Report December 2019