The report covers info as of February 20.

Romania’s GDP has increased by 2.9% in 2014, according to the first preliminary estimates. The growth was driven, during Jan-Sep, by actual final consumption – and not by the adjustments in the foreign trade (balance adjustments), as it was the case in the previous years. Detailed data for Q4 is not yet available, but the pattern seems to have remained the same. The exports and industrial output are expected to ease in the coming years, while the domestic demand for investments and consumption should keep driving the growth – under the baseline scenario drafted by the state forecasting body CNP in November. The government’s budget for 2015 stipulates that most of the public investments would be financed from EU funds, which is rather risky given the weak absorption rate so far (including in January 2015).

In the financial sector, the central bank has continued the rate cut cycle but the credit expansion has not gained ground yet. The banks ended 2014 with record losses after they have partly cleaned their balance sheets. Nonetheless, there is still a large amount of bad loans on their assets side and the NPL ratio has remained above 10%.

In a last-minute move, the finance ministry came up with a draft for broad fiscal reform. It includes massive tax rate cuts to be enforced as of 2016-2017. This should however be received in the complicated political context. The main opposition party PNL, after winning the presidential elections in November, prepares to take full power. As explained so far, the reforms proposed by the finance ministry and adopted in a first reading by the cabinet of PM Victor Ponta, look unsustainable – or at least it lacks the set of measures aimed at securing better tax collection that would balance the direct negative of the tax cuts on the budget revenues.

Key Points
• IMF completes Article IV consultations with Romania with broadly positive views…
• …but stand-by arrangement remains in limbo
• Romania’s GDP up 2.9% in 2014 – flash estimate; EBRD keeps 2015 GDP growth forecast for Romania at 2.8%
• Industrial output 6.1% up y/y in 2014; eases to 2.4% y/y in Q4; Export growth slows in Q4, trade gap widens
• Construction works down 6.7% y/y in 2014; up 2% y/y in Q4
• Retail sales up 7% in 2014 driven by non-food sales; fuel sales stagnate
• CPI inflation eases to 0.4% y/y in January
• Wages up by real 4.5% y/y in Q4; ILO unemployment down 0.6pp to 6.4% in December
• 2014 budget deficit down 21% y/y to 1.85% of GDP
• Romania’s EU funds absorption rate remains disappointing in January
• Government considers 0.5% of GDP derogation from fiscal compact to finance investments… and considers broad fiscal reform to be enforced by January 2016; considers cutting VAT rate, excises before end-2015
• ESA public debt up 1pp y/y to 39.4% of GDP at end-Nov, despite 3.4% of GDP (€5bn) rise in public debt
• Central bank cuts monetary policy rate by 25bp to 2.25%
• Romania’s banks post €1bn aggregated losses in 2014, mergers expected
• C/A gap narrows 40% y/y to €696mn, or 0.5% of GDP in 2014