This report covers the main Romanian macroeconomic releases of August 2014 [plus half of September] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to July.

Romania will not terminate its stand-by arrangement with the IMF before the March 2015 deadline, PM Victor Ponta stated. Romanian officials and a joint mission of the IMF, WB and EC are discussing in Brussels, starting September 16 until September 19, over the on-going stand-by arrangement [SBA] between the two parties. The discussions occur at a moment when Romania’s budget execution came to a problematic point despite very narrow deficit in January-July.

Romania’s GDP increased by 1.2% y/y in the second quarter of 2014, slowing down from the record 3.9% y/y advance in the first quarter, the statistics office said on Sept 3, confirming its flash estimate released on Aug 14. The second-quarter growth figure has surprised local analysts who expected a milder slowdown.

The gross industrial output index advanced by 5.7% y/y in July, after having lost ground to 8% y/y in Q2 from 10.2% y/y in Q1. While the industrial growth rises at still robust rates, the industrial companies apparently face profitability problems – as revealed by Q2 GDP data. Thus, the value added generated by industry increased by only 2.1% y/y in the second quarter of the year – a major slowdown from the 8% y/y advance seen in Q1.

Romania managed to absorb [actual disbursements] only EUR 36mn in July and EUR 204mn in August, compared to EUR 12bn it has to absorb by the end of 2015. After encouraging performances in the first months of the year, Romania absorbed EUR 1.9bn and it was broadly expected that full-year figure would exceed last year’s EUR 2.8bn.

The non-performing loans (NPL) ratio for the Romanian banking system decreased by 1.1pps m/m to 19.2% at the end of July 2014, the central bank announced. The decrease was by far the steepest since the NPL ratio started being calculated in September 2008. The sudden improvement in the bank assets quality was very likely driven by the sale of bad assets. The process is expected to continue, as the central bank pursues its plan on persuading banks to clean their balance sheets.

Key Points
• IMF, Romanian officials to hold talks over SBA in Brussels
• Fitch confirms sovereign rating, revises downward GDP growth projection
• Romania confirms 1.2% y/y GDP growth for Q2 2014
• Industrial growth eases to 5.7% y/y in July; Exports grow by 6.6% y/y in the month
• Construction works in Romania drop 19.8% y/y in July 2014
• Retail sales growth eases to 6.3% y/y in July from 8% y/y in Q2 2014
• Headline inflation eases to 0.84% y/y in August
• Budget turns to 0.4%/GDP surplus in July after 0.5%/GDP deficit in H1 2014
• Absorption of EU funds remains weak
• Banks to sell major bad loan bundles by end-2014 – sources
• Banks report -0.44% annualised ROA in Q2, remains profitable in H1
• Bank loans keeps shrinking, drop by 3.4% y/y at end-July 2014
• Central to cut interest rate at end-Sept meeting - local analysts