Romania’s current account (CA) balance and foreign direct investment (FDI) figures in the first five months of the year reveal a sharp increase in the country’s external deficit (+85% y/y), balanced by stronger FDI that strengthened 2.3 times compared to the same period last year.

While the country’s trade deficit has indeed increased and foreign investors may have been more active compared to the lockdown period last year, the situation is far less dramatic than the figures may suggest. FDI companies deferring tax payments under a COVID-19 facility strongly affected the balance of payments (BoP) and FDI data.

Romania’s CA deficit in the first five months of the year widened by 85% y/y, or €2.74bn, to €5.95bn (2.5% of GDP), the National Bank of Romania (BNR) announced.

The trade with goods is indeed a chronic problem and it contributed to the 85% y/y deterioration of the entire CA balance. More precisely, the deficit of the trade with goods (a massive €8.70bn in January-May) increased by €1.13bn (+15% y/y) — this is nearly half of the €2.74bn deterioration of the entire CA balance.

However, there is another CA element that had an even bigger impact and this is the primary income account.

Namely, the outflows under primary income account increased by €1.34bn to €4.62bn in January-May 2021from €3.23bn January-May last year. It is a fair assumption that most of this was in fact deferred profits accumulated by FDI companies over the past quarters, and declared in 2021 when the facility expired.

So once these profits were counted as outflows (under the direct income account) going out of the country, they were again counted as foreign direct investments (FDI) entering the country. In fact, the money never left Romania. 

FDI to Romania more than tripled in January-May

The FDI data reported by the BNR confirms the assumption of abnormally high profits reported by FDI companies in 2021, that were in fact profits realised last year and reported for tax purposes this year.

BNR announced that non-residents' direct investments in Romania more than tripled to €2.43bn in January-May this year, from €758mn in the same period last year.

The 2021 FDI figure looks impressive at first sight — particularly as more detailed data provided by BNR indicate a tenfold y/y expansion of the equity investments (not including reinvested earnings), to €585mn. The first question is raised by the small share of equity investments (the most relevant segment of FDI) in the first five months this year.

Compared to the €1.86bn worth of FDI in January-May 2019 (before the crisis), the €2.43bn still looks impressive and appears to be more than just a base effect caused by the absence of the foreign investors last year.

The details show, however, that it’s not the foreign investors’ rush that resulted in the tripling of FDI to Romania in the first five months of the year.

Out of the €2.43bn FDI, more than two-thirds — namely €1.76bn (from €395mn last year) — was formed by reinvested earnings, meaning profits declared by FDI companies in Romania for tax purposes. This category of foreign investments has increased artificially this year as the companies deferred their taxes due last year, under the government’s allowance.

Corrected for the deferred taxes, bne IntelliNews estimates the FDI in January-May at €1.4bn at most, still well below the €1.86bn in FDI in the same period of 2019.