This report covers the main Romanian macroeconomic releases of September 2014 [plus half of October] as well as financial and political trends in the country during this period. The short-term indicators released during the period refer mainly to August.
Short-term macroeconomic indicators released in Sep-Oct, for the month of August, indicate deterioration of the activity in the real sector. Even the banks eased the pace of cleaning their balance sheets – possibly under controversial bills on personal bankruptcy and forex loans conversion – that created volatility on the bad debt market. The real sector indicators point to a weaker third quarter of the year compared to the second one - -hence negative annual performance in Q3. The major domestic economy problem remains however the budget for next year, after the government took steps with negative impact on the fiscal balance and PM Ponta, running for president, promised even more steps in this direction. While the GDP will probably rise by above 2% this year and the budget deficit will meet the 2.2% of GDP target, any forecast for next year is subject to high uncertainty. The EU funds absorption and public investments might soar, on low base, with a positive impact on the growth rate, under an optimistic scenario. But if the executive keeps failing to fight tax evasion, the public investments are likely to remain weak. Similarly, there is no guarantee that the absorption of EU funds will soar – even if there is practically unlimited potential for using such funds next year.

The judiciary unexpectedly started working at full pace and this might provide a solution to the fiscal problem, even if creating short-term volatility [beneficial, in this case] on the political stage. Sentences against top politicians will eventually turn into the real perception, among lower rank public servants, that stealing can lead to jail. Curbing tax evasion would greatly improve tax collection and balance the budget.
Top politicians that were supposed so far to be above any prosecution, such as Ilie Sarbu, are under prosecutors’ investigations and others, such as Miron Mitrea are already in their way to jail. It seems therefore that the sentences against former PM Adrian Nastase, also in the group of politicians supposed to be immune to justice, were not mere accidents. The sentence against Dan Voiculescu earlier this year paved the way to more similar sentences that should in principle change the expectations of politicians in regard to the consequences of corruption deeds.

Key Points
• SBA with IMF might remain in limbo for a while, for various reasons
• Romania’s fundamentals strong enough for rating upgrade – Erste Group
• Nine former Romanian ministers probed in major “Microsoft” corruption case
• PM Ponta leads in poll for presidential elections, outcome increasingly uncertain
• Romania confirms GDP growth of 1.2% y/y in Q2 2014; IMF cuts 2014 GDP growth forecast to 2.4%
• Industrial output flat y/y in August 2014 as utilities, car production decline
• Romania’s exports lose steam to slim 0.9% y/y advance in August
• Construction works down 15.6% y/y in August 2014
• Retail sales growth eases to 3.7% y/y in August 2014
• Industrial prices up 0.5% y/y in Aug 2014, energy costs rise steeper
• Tax collection agency says revenues rise 0.5% above target in Jan-Sept 2014
• Budget deficit narrows 80% y/y to 0.24%/GDP in Jan-Aug 2014
• Government cuts EU-funded projects under second 2014 budget revision
• Central bank deems illegal personal bankruptcy bill endorsed by government
• NPL ratio of local banks drops 2.8pps q/q to 17.7% at end-July 2014
• Bank loans down 3.8% y/y at end-Aug 2014 as banks write off bad loans
• C/A gap widens 93% y/y to EUR 945mn in Jan-Aug 2014