After experiencing one of the strongest recessions in South-Eastern Europe, with a contraction of the GDP of -7,1% in 2009 and -0,8% in 2010, exports and the Romanian economy have regained momentum, growing by 3,5% in 2013. The country, which after risking an institutional crisis, now has the forty-year-old Grindeanu as its new premier, has thus entered a favorable cyclical phase which continued in the following two years, strengthened by domestic demand for private consumption and investments. The increase in the public minimum wage, the low price of energy, the reduction in VAT on food have supported consumer confidence and household demandand, while the availability of European funds (30 billion euros allocated for the period 2014-20) and interest rates at historic lows have favored investments.
In 2015, Romania's GDP grew by 3,8% with the contribution of private consumption equal to 5,6pp and that of investments equal to 1,8pp. The contribution of net exports was instead negative (-5,0pp) due to the growth in imports; public spending made no contribution to GDP growth. In the first quarter of 2016, GDP grew by 4,3% and then accelerated to 5,9% in the following quarter with a good performance of manufacturing production, up 2,5%. At the same time, exports also maintained a significant growth rate: 5,3% in nominal terms. Here then is the Intesa Sanpaolo Study and Research Centre provides one growth of 4,4% for the whole year, where domestic demand drives the GDP trend, with the contribution also of public spending (the public deficit is expected to rise to 3,0% of GDP).
In June 2015, inflation turned negative (-1,6%) following the reduction of the VAT rate on food products from 24% to 9%. All in all, analysts expect inflation to remain negative again at the end of this year (-1,6% on average), before returning to positive territory in 2017 due to wage increases, the expected progressive strengthening of demand and the prices of energy on the rise due to the recent recovery in oil prices, which rose to $52 a barrel and is forecast at $60 in 2018.
The budget deficit, equal to 6,3% of GDP in 2010, gradually decreased to 1,5% in 2015. Thanks to prudent fiscal policies, partly under the IMF's Stand-by Agreement assistance programme, the country has significantly improved the budget imbalance. Last year the public deficit was even better than planned thanks to the good economic growth higher than expected: now, however, the public finance prospects are seen as deteriorating by the IMF itself, which forecasts a deficit increasing to 3,0% in 2016 and 3,3% in 2017, resulting in an increase in public debt to 40% of GDP due to lower tax revenues. In the medium-long term, if the public deficit were to remain at 3,3%, public debt would rise to 55% from the current 39,6% of GDP.
In 2012 the current deficit was 4,8% of GDP, down from 5,0% in previous years but still quite high; starting from 2013, thanks in part to the correction of the public deficit, the current deficit began to decrease. In 2015, the external account deficit amounted to 1,1% of GDP, while the current account was in negative territory due to trade in goods and services and also due to the income account deficit. The IMF sees the current deficit increasing again next year (-2,5%) due to the strengthening of domestic demand and consequently of imports. And with a current deficit stably at 2,5%, in the medium-long term the external debt could nonetheless settle at 50% of GDP, down from the current value of around 60%. in perspective, the deficit is expected to increase due to the expected growth of imports, however remaining below 2,5% would allow maintaining the medium-long term sustainability of external debt.
In this scenario, the prospects for a strengthening of Romania's economic fundamentals over the long term remain positive, accompanied by the implementation of the reforms necessary to increase the country's competitiveness. The current structure of the institutional system has overall improved in recent years: on the basis of the Global Competitiveness Index calculated by the World Economic Forum, between 2007 and 2016 Romania went from a score of 3,97 to 4,3 on a scale ranging from 0 (least competitive) to 7 (most competitive). Here then is that the country's competitiveness has increased thanks above all to the education system, while the competitiveness of infrastructures and the judicial system still appears weak. The greatest element of economic vulnerability of Romania is represented by external debt, equal to about 60% of GDP; however the partial correction of the current deficit implemented since 2013, although expected to decrease in the next few years, could allow a stabilization of the external debt close to 50%, provided that the current deficit remains below 2,5% in the medium/long term. The Fitch and S&P's agencies give the country a BBB- rating in view of the contained public deficits and debt, which however remain the object of attention due to the risks of their excessive increase in the event of fiscal policy accentuating its pro-cyclical orientation. Baa3 is the judgment expressed by Moody's.
