Romania economy briefing: Accumulating deficits. Developments in the current account deficit - China-CEE Institute
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ISSN: 2560-1601
Vol. 39, No. 2 (RO)
April 2021
Romania economy briefing:
Accumulating deficits. Developments in the current account deficit
Oana Cristina Popovici
1052 Budapest Petőfi Sándor utca 11.
+36 1 5858 690
Kiadó: Kína-KKE Intézet Nonprofit Kft.
office@china-cee.eu
Szerkesztésért felelős személy: Chen Xin
Kiadásért felelős személy: Huang Ping china-cee.eu
2017/01Accumulating deficits. Developments in the current account deficit
Romania’s current account deficit was the largest in the European Unions (EU) in the
last quarter of 2020 and the negative evolution continued in the first two months of this year,
especially due to the worsening of the trade deficit. The current account deficit is at the alarm
threshold and could cumber Romania’s ease to borrow money from foreign markets, especially
that most of its components registered a worsening of the situation. Trade deficit continue to
increase, and the recovery of the transport machinery and equipment sector could not surpass
the chronic vulnerability in the food sector, where the deficit represents a major problem,
especially for a country with the agricultural potential of Romania.
Romania had the largest current account deficit in the EU in the last quarter of 2020, of
EUR 3.5 billion, followed by Greece (EUR 2.7 billion) and Bulgaria, Estonia and Cyprus (EUR
0.8 billion), according to Eurostat. The current account deficit puts pressure on the exchange
rate and, together with the budget deficit, creates big problems for an economy. Romania has
to face both situations. Although the exchange rate fluctuation was insignificant in the last year
(below 2%), the budget deficit suffered a severe deterioration (almost 10% of GDP) and the
current account deficit increased (raising towards 5.1% of GDP). Economists consider that the
current account deficit represents a major problem worldwide, if it exceeds 5% of GDP. So far,
Romania maintained to keep it under this limit and therefore to retain investors’ trust, which
has been seen in the low interest rates for the Romanian Government’s borrowings from
international markets. However, surpassing this threshold could raise worries and difficulties.
The situation is worsening since the beginning of this new year. The latest data for the
current account deficit in the first two months of 2021 indicate a level of EUR 1.6 billion, which
is 3.8 times higher than in the same period of the previous year. The deficit on the side of goods
increased by 19%, while the combined goods and services segment recorded a 16% increase in
the external deficit. One of the few good news is the significant increase (+ 21%) in the positive
balance for services. Otherwise, almost each component of the current account saw negative
evolutions in the last period.
Against the background of reduced travel, the deficit in tourism has been reduced, being
only 45% from that recorded in the same period last year. However, the coverage of the
expenditures by the revenues in the tourism sector continued to decline and reached only 44%.
1On the segment of primary income, which includes income from work, income from
investments in financial assets (such as direct investments, portfolio and other investments) and
other primary income (taxes, subsidies), the revenues decreased by about 5%, simultaneously
with a significant increase, of 23%, of outgoing amounts. This situation led to a sharp decrease
in the surplus usually registered for this category. Since the beginning of the pandemic,
Romania had to face larger than usual fluctuations in the inflows of foreign direct investments
(FDI). FDI was a component that supported the recovery of the economy after the economic
crisis in 2008 and was on an annual upward trend since then, with only moderately decreases.
However, the direct investments of non-residents in the first two months of 2021 amounted to
EUR 578 million, about one-sixth less than the EUR 690 million euros recorded in the same
period of 2020. However, the association of the largest investors in Romania signals that there
are strong investment intentions for this year. The category of secondary income also saw a
major reversal of the situation. This type of revenues, including the transfers of Romanians
working abroad, decreased sharply, by -38%, while the outflows increased by 17%. This have
led to a general negative change of over half a billion euros in the current account situation.
However, trade deficit has the largest impact on the current account. The trade deficit
increased in February 2021 to EUR 1.9 billion, almost 60% more than the previous month,
according to data provided by the National Institute of Statistics (NIS). Therefore, the trade
deficit in the first two months was EUR 3.07 billion. This development took place against the
background of a negative pace of monthly exports’ evolution, which dropped by -2.5%.
Although such an evolution is considered acceptable in the conditions of the crisis, it is however
in stark contrast to the increase by 6.1% in imports. The coverage of imports with exports was
at 81.7%, a value which is still slightly better than in the first two months of the last year, but
problematic for the macroeconomic stability. Romania has negative trade balances of about
EUR two billion with EU countries and EUR one billion with the rest of the world. In the first
two months of this year, important shares in the structure of exports and imports were held by
transport machinery and equipment (50% for exports and 37.2% for imports) and other
manufactured products (30.1% for export and 30.2% on import).
The deficit in the goods segment is already equivalent to 1.34% of the GDP estimated for
2021 after just two months. There seems to be a chronic imbalance, especially that similar
countries in this region had better performances, registering only minor deficits or even trade
surplus. The transport machinery and equipment sector is the only one which still has a
significant positive balance. It started to perform well since the beginning of the year, with a
balance of exchanges almost similar to the whole value in 2020, when it was strongly affected
2by the crisis. However, for the rest of the manufactured products, the deficit is increasing
monthly, questioning the prospects of the industry in the recovery process, according to
economists. The deficit in the food sector has already exceeded EUR 500 million after the first
two months of the year, and the sectoral coverage of imports from exports was only 60%,
compared to 100% six years ago, which should be a major alarm signal for a country with
Romania’s agricultural potential. Romania’s export of agricultural products largely depends on
the productions obtained for three products: cereals, seeds and animals. In addition, the major
problem in agriculture is that of large fragmentation of arable lands and the lack of irrigation
systems, therefore the crops being under the massive influence of the weather and drought. The
large volume of agro-food imports has become a vulnerability, with possible systemic potential,
according to an analysis of the National Committee for Macroprudential Surveillance.
The representatives of the National Bank of Romania (NBR) also indicate that the trade
deficit is the one causing the major current account deficit. National Bank’s data from
December show that the trade deficit was almost EUR 19 billion. The negative performance is
ameliorated by the surplus in trade in services, which saw an increase of EUR 9.6 billion. There
is a huge deficit in the area of agricultural products, which is not normal for a country that could
export significantly in this area. Economists admit that the structure of the economy causes this
deficit. Romania imports in order to export, but unfortunately the value of these exports is low.
A NBR representative showed that there are areas where 80% of imports are destined for
exports.
A new estimation of the International Monetary Fund (IMF) shows improved forecasts
for Romania’s economic growth, from the 4.6% GDP increase considered in autumn 2020. IMF
estimates that Romania will have the second highest economic growth in the EU in 2021, of
6%. However, regarding the current account deficit, the current estimations of the international
financial institution indicate that it will be very little reduced, up to 5 % of GDP in 2021 from
5.1% of GDP in 2020, as compared to the decrease up to 4.5% of GDP, as estimated in the fall
of 2020.
Romania’s current account deficit has steadily deepened in recent years, following a
similar evolution of the trade deficit in goods. Despite the increase of the exports, it was not
possible to surpass the higher growth in imports. The pandemic accentuated this trend, in the
context in which in the western economies, the main commercial partners of Romania, the
demand for the products exported by Romania decreased. Moreover, Romania’s industry and
exports are dependent on the car industry, which had a very weak year in 2020. The Government
expects that in 2021 the net export situation will improve compared to 2019 and 2020 and
3similar opinions are shared by other economists and private institutions. This perspective is
supported by the premises of improving the domestic supply of goods and services, by the
persistence of the saving rate at a high level and by the depreciation of the real effective
exchange rate of the national currency. Measures in this direction could also target foreign
investors, in order to create a business environment attractive for investments. For agriculture,
the access to finance should be improved, in order to support farmers and to stimulate a wider
digitization of production and distribution processes.
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