Chart of the week: Romania’s trade balance still plunges into deficit area



Romania’s trade deficit has almost tripled over the past five years (2018 compared to 2013) to reach its highest level after 2008. The increase in imports, driven by strong domestic demand, has far exceeded the development of exports, which slowed against a backdrop of weaker economic growth in Europe. Imbalances are expected to continue growing this year, according to January data.

Romania’s foreign trade gap widened 62% year-on-year to reach 1.26 billion euros in January. Thus, the trade gap in the 12 months ending in January was 15.6 billion euros, which is 18.9% more than in the year ending in January 2018 and some 7.8 % of GDP. The data is reported in FOB / CIF terms by the National Institute of Statistics (INS) and shows that local producers are not meeting the growing demand.

Exports increased 1.6% year-on-year in January, the weakest performance since April 2017, to 5.51 billion euros. Imports, on the other hand, jumped 9.2% year on year to 6.77 billion euros. The disappointing performance of the country’s exports came against a backdrop of weakening prospects in Europe, Romania’s main export market, and is therefore also expected to prevail for some time. Imports, on the other hand, were driven by growing demand driven by household incomes. January’s foreign trade followed the trend observed in recent years, when Romania’s imports grew faster than exports. Imports in the rolling 12 months ending in January increased 9.0% year-on-year (to 83.4 billion euros) while exports grew only 7.0% year-on-year to 67.8 billion euros.

External deficits put pressure on the local currency, external debt

The trade deficit occurs when a country imports (for consumption or investment) more goods than it exports. When such deficits are large and persistent, as is the case in Romania, they usually appear in the form of exchange rate pressures – which, unsurprisingly, have become visible in Romania recently. Exchange rate corrections (to a weaker local currency) act as automatic stabilizers, making imports more expensive and stimulating exports. A moderate weakening of the currency is therefore expected, but it is far from sufficient to transform the trade deficit into a surplus. Moreover, in addition to the pressure on the exchange rate, persistent trade differentials usually appear in gross external debt (unless non-debt financing is found). Below 50% of GDP, Romania’s gross external debt is still moderate.

To exchange the balance is only part of the external balance

In the long run, a country must either balance its trade with goods or find another way to finance it – through a surplus in trade with services (net export of services) or through inflows of foreign investment. Accumulation of debt is an alternative, but the least sustainable. Romania finances its net imports of goods mainly through net exports of services (net exports of services covered more than half of net imports of goods in 2018) but also through inflows from the EU budget and remittances. wages (money sent home by Romanians working abroad). These financing resources not being sufficient, the country records a current account deficit (net outflow of money) which can be financed either by Foreign Direct Investments or by the accumulation of debt. Each of these two alternatives has its drawbacks: FDI leads to permanent outflows (dividends), while debt must be repaid. Romania’s gross external debt (GED) increased 5.4% (5.1 billion euros) year-on-year according to central bank data. In particular, the current account deficit of 9.4 billion euros in 2018 resulted in a smaller advance by the GED over the year. As a result, the GED / GDP ratio at the end of January 2019 was 48.7%, lower than the ratio of 49.6% calculated a year earlier at the end of January 2018 and a moderate level in absolute terms (compared to peers).

Romania’s current account (CA) deficit, which has as its core the net import of goods, is on the verge of exceeding the sustainability criterion (4% of GDP, the average over a three-year period). The CA recorded a deficit of 9.4 billion euros in 2018, 58% more than the deficit posted a year earlier, in 2017. Compared to the GDP for the year, the CA deficit widened from 3.2% in 2017 to 4.6% in 2018, thus reaching a level that exerts some pressure on the country’s external balances, heralding an exchange rate correction. Its magnitude depends on the elasticity of exports and imports, among others.

The widening trade gap is no surprise

From a broader perspective, the trade deficit came as no surprise, against the backdrop of consumer-led growth. The public forecasting body predicted a trade deficit of 14.7 billion euros in 2018, according to its forecasts published in February 2018, and the actual figure was only slightly higher: 15.1 billion euros. CNP correctly predicted that imports would grow faster than exports. Private consumption has been and will remain the main driver of growth in the years to come. In principle, this should not necessarily increase imports, but it depends on the ability of local producers to meet growing demand.

Rising domestic demand pushes up imports

The main driver of Romania’s trade deficit is robust domestic demand. Real final consumption reached 80% of GDP in 2018, compared to 76% in 2014-2015 and is close to the peak of 81% observed in 2008 before the recession. But weaker external demand has recently emerged as an increasingly important factor. Quarterly exports declined in the third and fourth quarters of last year compared to the first two quarters of the year, contrary to the seasonal trend. Annual export growth plunged to 2% -3% yoy in November-January, from a longer-term average of more than 8% yoy predicted by the state forecasting body.

The outlook remains volatile in a context of unrealistic public strategy

The CNP does not see any improvement in the foreign trade balance over the next four years: imports would grow by 9% per year (pa), against a more moderate increase of 8.5% per year in exports. Therefore, the trade gap is expected to increase by an average annual rate of 11.2%. Either way, the same CNP expects other inflows (funds from the EU budget) to offset the trade deficit and lead to a actually smaller current account deficit (2, 4% of GDP in 2022, compared to 4.5% of GDP in 2018). But the whole scenario is based on expectations of annual GDP growth rates of more than 5%. In a more realistic scenario, growth rates of around 3% would lead to lower trade deficits. Be that as it may, consensus projections indicate a turnover deficit of over 4% of GDP in the medium term. In the short term, the exchange rate correction and several large investment projects (eg Ford launching a new model) could mitigate the widening trade gap. However, in the longer term, investments in infrastructure and regulatory predictability (necessary for offshore gas projects in the Black Sea, but also for other private investors) are essential to achieve at least a sustainable trade balance.

By Iulian Ernst, editor-in-chief; [email protected]



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