1

Romania: Post-crisis performance and current challenges

Mugur IsărescuGovernor

Bucharest, 31 May 2019

AmCham CEO Forum

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GROWTH, CONVERGENCE AND SUSTAINABILITY

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Romania registered an impressive post-crisis performance Average annual growth rate of 4.6 percent in the last five years

The advance seen in recent years was primarily driven by consumption High consumption rates were accompanied by strong imports

In spite of high export growth rates, this caused a significant current account deficit widening

To preserve this growth trend, economic policies should focus on its sustainability There is no substitute for a coherent mix of macroeconomic policies

and structural reforms

Romania’s economy is constantly growing

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After several consecutive years of economic growth, Romania’s GDP currently stands well above the pre-crisis level

4.7

8.0

7.2

9.3

-5.5

-3.9

2.0

2.1

3.5

3.4 3.

9 4.8

7.0

4.1

5.5

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

f

100

110

120

130

140

150

160

170

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q3

2012

Q1

2012

Q3

2013

Q1

2013

Q3

2014

Q1

2014

Q3

2015

Q1

2015

Q3

2016

Q1

2016

Q3

2017

Q1

2017

Q3

2018

Q1

2018

Q3

lei billion, 2008 prices (s.a.)

pre-crisis level

2018

Q4

Real GDP

annual change (%)

Source: NIS, National Commission for Strategy and Prognosisf) forecast

5

Romania’s economic growth was significantly above the EU average,chiefly due to consumer demand

0

2

4

6

8

IT BE DK DE UK FR EL PT FI SE ES HR LU NL AT CZ BG LT EE CY RO SK SI LV HU PL MT IE

-3

0

3

6

9

-3

0

3

6

9

2011

2012

2013

2014

2015

2016

2017

2018

net exportchange in inventoriesgross fixed capital formationfinal consumptionreal GDP (rhs)

annual change, %contributions, pp

Contributions to economic growth in Romaniaannual change, %

EU28 = 2.0%

Economic growth in EU Member States in 2018

Source: Eurostat, NIS, NBR calculations

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Worsening of external imbalance on the back of robust domestic absorption

-11.5

-4.6

-5.1 -5.0 -4.8

-1.1-0.7

-1.2 -2.1-3.2

-4.5

-16

-12

-8

-4

0

4

8

12

-16

-12

-8

-4

0

4

8

12

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

current account balancehousehold final consumption (rhs)domestic absorption (rhs)

% of GDP

-18

-15

-12

-9

-6

-3

0

3

2014

2015

2016

2017

2018

3M 2

018

3M 2

019

consumer goodscapital goodsintermediate goodsgoods not elsewhere classifiedgoods deficit

Balance on trade in goods

EUR bn., fob - fob*

+33%

Source: NIS, Eurostat, NBR, NBR calculations

Domestic absorption and external balance

RO

-10

-5

0

5

10

15

-10 0 10 20

OX: current account balance (% of GDP), 2017OY: current account balance (% of GDP), 2018

Current account in EU Member States

annual change, %

*) according to BPM6, goods under processing trade arrangements are excluded

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Romania has certainly come a long way in terms of economic convergence Significant increase in per capita GDP as a share of the euro area average

(based on PPS), from 31.3 percent in 2005 to 60.4 percent in 2018

Practical experience has showed us that the Eurozone is not a “convergence club” A high enough level of real convergence (in addition to compliance with the

nominal convergence criteria) is needed when joining the euro area

The level of convergence should increase in a sustainable manner The pace of this process should be in line with the economic fundamentals

A durable economic growth is extremely important alsofrom the perspective of euro adoption

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Significant progress in terms of real convergence, but the process is far from completion

0

20

40

60

80

100

120

MT CZ SI CY LT EE SK PL HU LV RO HR BG

2000 2018 the year before euro adoption

GDP per capita (PPS) as a share of EA average, %

Source: EC

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FINDING THE RIGHT BALANCE BETWEEN CONSUMPTION AND INVESTMENT

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A short-term focus on economic policies ought to be avoided, as it leads to suboptimal outcomes The adequate approach is to ensure a rebalancing, not by discouraging

consumption, but by stimulating investment

Promoting investment is also a way to reduce development gaps between Romania’s regions These imbalances can be mitigated, first and foremost, through

investment in infrastructure (for instance, the construction of highways is essential for connecting Romania’s regions)

The concern for durable growth should prompt a switch to policies aimed at fostering investment

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NWGDP/capita, euro (2017): 8,600

Population (1 Jan. 2018):2.56 mill. pers.

WGDP/capita, euro(2017): 10,200

Population (1 Jan. 2018):1.78 mill. pers.

CentreGDP/capita, euro(2017): 9,100

Population (1 Jan. 2018):2.33 mill. pers.

NEGDP/capita, euro(2017): 5,900

Population (1 Jan. 2018):3.22 mill. pers.

SEGDP/capita, euro(2017): 8,100

Population (1 Jan. 2018):2.42 mill. pers.SW

GDP/capita, euro(2017): 6,900

Population (1 Jan. 2018):1.95 mill. pers.

SGDP/capita, euro (2017): 7,700Population (1 Jan.2018): 2.97 mill. pers.

B-IF

B-IF(Bucharest-Ilfov):

GDP/capita, euro (2017): 22,000

Population (1 Jan. 2018):2.30 mill. pers.

Source: Eurostat

In 2017, the wealthiest region in Romania was almost four times richer than the poorest one

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LOOKING FOR A WAY OUT OF A LABOUR MARKET DILEMMA

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On the one hand, they cannot be considerably below those in other economies, as this would lead to a labour force drain

We are facing an emigration problem today, as a significant percentage of the population have left their homeland for other EU Member States

On the other hand, if wages increase too much, attracting investment may become a problem

Wages need to go up, but they should remain compatible with preserving competitiveness

The key is to increase wages at an adequate, sustainable pace and only by boosting productivity

The adequate path of the wage level in the Romanian economy is the subject of heated debate

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Labour market tightening, with pay rises additionally fuelled by institutional factors, via the minimum wage and the budgetary sector wage

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

2017

Q1

2018

Q1

2019

Q1

number of employeeseconomy-wide

labour market tightnessindicator (rhs)

0

6

12

18

24

30

36

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

2019

Q1

economy (total)private sectorbudgetary sector

annual change (%)

Net real wageNumber of employees economy-wideand labour market tightness

annual change (%) s.a.

Source: NIS, NBR calculations

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KEEPING THE EXTERNAL DEFICIT IN CHECK

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Increase of ULC in recent years threatens competitiveness

-20

-10

0

10

20

2010

Q1

2010

Q2

2010

Q3

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

2019

Q1*

ULC measures – variation band ULC measures – average value

annual change (%)

Source: Eurostat, NIS, NBR estimates

Unit labour cost developments

Note: ULC measures include the annual dynamics of unit labour costs economy-wide (based on both the number of persons employed and the hours worked) and unit wage costs in industry. In case of unit wage costs in industry, starting January 2018 (until December 2018), the annual dynamics of the gross wage are adjusted for the effect of changing the way social contributions are leviedand their overall level (from 16.5 percent and 22.75 percent for employees and employers respectively to 35 percent and 2.75 percent), as well as of the decline in income tax from 16 percent to 10 percent, so that the resulting values should reflect developments in unit labour costs.

*) data available only for unit wage costs in industry

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To the extent to which the upward path of wage costs is too steep, it gets very difficult to preserve competitiveness

If the Romanian companies are unable to gain market shares in the tough competition with rivals, the gap between imports and exports widens, causing the deepening of the trade deficit and hence of the current account deficit

The latter is already at a level that raises concerns, also in terms of its financing by flows deemed stable (such as FDI and European funds), which have no longer fully covered it

The wage matter is also closely linked to ensuringa balanced external position

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Romania’s external imbalance is singular in the region in terms of its size-8

.7

-10.

5

-13.

6

-11.

5

-4.6

-5.1 -5.0 -4.8

-1.1

-0.7 -1

.2

-2.1

-3.2

-4.5

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-15

-10

-5

0

5

10

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Czechia Hungary

Poland Romania

% of GDP

Current account balance: regional comparisonsCurrent account balance: Romania

% of GDP

Source: NIS, NBR

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However, Romania’s current account deficit has been mostly financed from stable capital inflows

-12

-9

-6

-3

0

3

6

9

12

2016 2017 2018

current account loans stable flows* volatile flows** other flows

-4

-3

-2

-1

0

1

2

3

4

3M 2018 3M 2019

EUR bn., balanceEUR bn., balance

*) direct investment and capital account**) portfolio investment and deposits

"+" inflows; "-" outflows

Source: NBR

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Inflation targeters in the region record monetary policy rates and interbank rates below the inflation rate;

in 2018, Romania posted the widest fiscal deficit and external imbalance

Annualinflation rate

(%, April)

Monetary policy rate

(%, 29 May)

3M interbank rate

(%, 29 May)

Budget balance

(% of GDP, 2018)

Balance on trade in goods

(% of GDP, 2018)

Current account balance

(% of GDP,2018)

Czechia 2.8 2.0 2.19 0.9 4.1 0.3

Hungary 3.9 0.9 0.20 -2.2 -1.1 0.4

Poland 2.2 1.5 1.72 -0.4 -1.0 -0.7

Romania 4.1 2.5 3.26 -3.0 -7.3 -4.5

Source: Ameco, Bloomberg, Eurostat, NCBs, national institutes of statistics

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It is essential to keep macroeconomic imbalances in check and to promote structural reforms so that the Romanian economy does not witness major vulnerabilities in a global environment marked by so many uncertainties

To make forecasts in such an environment is not an easy task, but one thing is sure: it takes a lot of economic policy wisdom to sail safely in waters that are not exactly tranquil

As Abraham Lincoln once said, “The best way to predict your futureis to create it”

Conclusions