As shown in the Financial Stability Report June 2019 published on June 5th by the National Bank of Romania, the financial stability has remained adequate since the release of the previous Report, yet the associated risks are on the rise, amid global economic and financial developments marked by heightened uncertainty, alongside the resurgence on the domestic front of the risk of an uncertain and unpredictable legislative framework in the financial and banking sector.
The developments recorded by the Romanian financial system in 2018 are indicative of the financial cycle being in the latter part of its expansion phase, which calls for an increased monitoring of systemic risks, given some early warning signals on the evolution of the default risk for loans to the private sector.
According to the same source, the latest assessments on systemic risks to financial stability in Romania do not point to any severe risks. Nevertheless, systemic risks have increased overall compared with the end-2018 assessment, three of them ranking as high. The other two are assessed as moderate and low respectively. All risks, except for those regarding the deterioration in investors’ sentiment towards emerging economies and the default risk for loans to the private sector, are estimated to follow an upward trend in the period ahead.
The risk of tensions surrounding macroeconomic equilibria has been further manifest, amid the deterioration of the current account balance and the uncertainty arising from the fiscal policy stance, while the composition of economic growth has remained suboptimal. The twin deficits continued to worsen. The budget deficit reached 3 percent of GDP in 2018, while the structural deficit rose to 3.6 percent (compared with the 1 percent-of-GDP target in the Stability and Growth Pact) and is anticipated to widen, which diminishes the authorities’ ability to act counter-cyclically when economic activity slows down.
Excess demand indicates rising inflationary pressures, with effects on the external balance as well. The current account deficit increased, posting the highest value at a European level, and was financed only partly by non-debt-generating capital flows. Although with a smaller contribution, consumption remained the chief driver of economic growth. Conversely, investment contracted, while net exports continued to erode real GDP dynamics. All these drove the risk of tensions surrounding domestic macroeconomic equilibria up a notch, from moderate to high systemic risk, and the outlook is on the upside for the period ahead.
For further information: NBR – Financial Stability Report