Consumer bonanza effect? Romania posts EU second-largest current account deficit. Former Finance minister: “Exports cannot simply catch up with the government’s fiesta”

Sorin Melenciuc 04/10/2018 | 11:09

Romania has registered the second-largest current account deficit among the 28 European Union member states in the second quarter of this year, of EUR 2.6 billion, on consumer bonanza stimulated by years of wage-led policies.

In the EU, 11 member states registered current account deficits in Q2 2018, while 16 countries posted surpluses and one state has balanced current account, according to Eurostat data.

The largest current account deficits were recorder in Q2 2018 in the UK (EUR 20.7 billion), Romania (EUR 2.6 billion), Belgium (EUR 2.4 billion) and Finland (EUR 2.1 billion).

“The highest surpluses were observed in Germany (+ EUR 63.8 bn), the Netherlands (+ EUR 16.8 bn), Italy (+ EUR 10.5 bn), Ireland (+ EUR 10.2 bn) and Denmark (+ EUR 3.6),” Eurostat said.

According to National Bank of Romania (BNR), Romania’s current account balance of payment registered a deficit of EUR 4.81 billion in the first seven months of this year, up 15.6 percent compared with January-July 2017.

Last year, the current account balance of payments registered a deficit of EUR 6.46 billion, or 3.4 percent of GDP.

Looking at the current account balance relative to the size of the economy, Romania’s current account deficit as percent of GDP  is the second highest in the EU, after Cyprus ,  with a forecast of   -3,6% for 2018, Anca Dragu, ex- Finance Minister explained for Business Review. “Current account deficits as percent of GDP are forecasted for the UK at -3.5%, France -2.9%, Lithuania -2.3%, Greece -0.4%. All other EU member states have surpluses in their current accounts, for example +1.4% in Bulgaria, 6.6% for Slovenia, 2.8% for Croatia, 1.2% for Hungary and 0.3% for Poland. For the European Union, the current account is foreseen to be in surplus by 2.2% of GDP in 2018”, she explained.

 

 

 

“Government is pouring gas on fire and it is throwing around RON 28 billion  into an already heated economy. This additional money become internal demand that is covered form imports. Exports cannot simply catch up with the Government fiesta”,

Anca Dragu, former Finance minister

 

 

 

In case of Romania, the current account deficit is associated with the high and procyclical budget deficit, the highest in the EU, forecasted at 2.97% of GDP in 2018. “It means that the state is pouring gas on fire and it is throwing around RON 28 billion  into an already heated economy. This additional money become internal demand that is covered form imports. Exports cannot simply catch up with Government fiesta”, she explained.

Another important issue when talking about external imbalances is the financing of the current account: who is financing the additional exports and how? “In the first half of the 2018 we noticed two worrisome developments:  a slow trend of foreign investments (FDI) and an unfavorable  change of the structure of external position,  where debt items are increasing much higher than equity”, Anca Dragu stated.

A separate report from the National Institute of Statistics (INS) showed that Romania increased by 34 percent its imports of crude oil and petroleum products, 21,3 percent its road vehicles imports in the first half of this year, by 17.8 percent its imports of animal oils and fats, and by 11.6 percent its imports of meat.

In 2017, Romania’s GDP recorded a growth of 6.9 percent in real terms, up to RON 858.3 billion (EUR 187.9 billion), according to INS revised data.

The growth rate recorded in 2017 is the highest since 2008 for Romania, and the highest in EU.

But Romania is still the second-poorest EU country if we look at the more relevant GDP/capita index, with around EUR 9,600 per inhabitant in 2017.

Romania’s economy is losing steam since the beginning of this year, after several years of high growth rates.

Consumer bonanza

Experts point out that much of the economic growth in Romania is the product of a consumer bonanza, stimulated by years of wage-led growth government policy.

The Romanian consumer market increased by more than EUR 10 billion in 2017, to EUR 114.5 billion, due mainly to higher wages paid by employers. The total wage bill rose from EUR 57.7 billion in 2016 to a record level of EUR 67.7 billion in 2017, according to Eurostat data.

INS data show that household final consumption expenditure, the index measuring what people – acting either individually or collectively – spend on goods and services to satisfy their needs and wants, rose 10.2 percent in 2017 compared to the previous year.

During the last few years, the government adopted a strategy of wage-led growth, stimulating household consumption and GDP growth rates, but this model has generated larger fiscal and current account deficits.

The International Monetary Fund (IMF) recently said that a more cautious fiscal discipline would help rebalance Romania’s economy and lessen the burden on the monetary policy.

The IMF report warns that as Romania’s economy shows signs of overheating, “there is a risk that the current policy trajectory increases macroeconomic volatility, undermines the capacity to withstand adverse shocks, and eventually slows down convergence toward the advanced EU countries.”

The Fund criticized the decrease of investments in the public sector, as well as the lack of structural reforms and high inflation rate.

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