Romania – nominal andreal convergence
on the way to euro adoption
Ionut DumitruPresident of the Fiscal Council and
Chief-economist, Raiffeisen Bank Romania
February 2015
Eurozone enlargement – current status
Source: European Commission
Initial target Date of setting the target Current targetBulgaria 2010 2004 no target dateCroatia 2019 no target dateCzech Republic 2009/2010 2003 no target dateHungary 2008 2003 no target dateLithuania 2007 2004 2015Poland 2008/2009 2003 no target dateRomania 2014 2007 2019Denmark no target not obliged to joinSweden no target de facto opt-outUnited Kingdom no target not obliged to join
I. Nominal convergence.Maastricht criteria
Source: European Commission
Nominal convergence: Maastricht criteria
1. Inflation
“the achievement of a high degree of price stability; a Member State has a price performance that is sustainableand an average rate of inflation, observed over a period of one year before the examination, that does notexceed by more than 1.5 percentage points that of, at most, the three best performing Member States in terms ofprice stability.”
2. Long-term interest rate developments“observed over a period of one year before the examination, a Member State has had an average nominallong-term interest rate that does not exceed by more than two percentage points that of, at most, the three bestperforming Member States in terms of price stability. Interest rates shall be measured on the basis of long-termgovernment bonds or comparable securities”
3. Public budget deficit is below 3.0% of GDP“the sustainability of the government financial position will be apparent from having achieved a governmentbudgetary position without a deficit that is excessive”, i.e. that exceeds 3.0% of GDP on permanent basis
4. The ratio of government debt to GDP is less than 60% of GDP
5. Exchange rate stability under ERM II mechanismMember State has respected the normal fluctuation margins [+/-15%] provided for by the exchange ratemechanism on the European Monetary System without severe tensions for at least the last two years before theexamination
Source: European Commission
Sustainability of public financial position
Note: European Commission (Feb 2015)
0
10
20
30
40
50
60
70
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
F
20
15
F
20
16
F
Gross public debt (% of GDP)
Romania's EUaccession >>>
Maastricht criteria: 60% of GDP
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
F
20
15
F
20
16
F
Public budget balance (% of GDP)
Romania's EUaccession >>>
Maastricht criteria: -3.0% of GDP
2009-2013: EDP in place
Source: European Commission, European Central Bank
Inflation and long-term interest rates
Note: Reference values for December 2014 (1.3% for inflation and 4.8% for 10Y LCY yields) were computed as averages for Spain, Portugal and Slovakia.Similar to the assessment performed by the ECB in April 2014, there were excluded from computations Greece, Bulgaria and Cyprus.
0
2
4
6
8
10
12
14
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Assesment of Maastricht Criteria on inflation
Maastricht reference criteria as computed by the ECB/ECMaastricht reference criteria - own estimatesAnnual inflation rate in Romania (% yoy, average 12-months)
0
2
4
6
8
10
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Assesment of Maastricht Criteria on interestrates (10-year LCY yields)
10-year yield on RON T-bonds (%, average last 12 months)
Maastricht reference criteria as computed by the ECB/EC
Maastricht reference criteria - own estimates
Source: Eurostat
Achieving the inflation criterion is a difficult task
3.6
3.0
2.7 2.6
2.3 2.32.1
1.9 1.9 1.9
RO EE HU UK FI AT LT MT LU PL
Average annual inflation rate (from Dec2009 to Dec 2014) - 10 largest advances
EU 28 average = 1.8%
4651 52
5660
63 65 65 67
73
Bu
lga
ria
Ro
ma
nia
Po
lan
d
Hu
ng
ary
Lith
ua
nia
Cro
ati
a
Cze
ch R
ep.
Slo
vak
ia
Latv
ia
Esto
nia
Level of consumer prices in 2013(% of Euro area 15), 10 lowest levels
Note: level of consumer prices is computed based on household finalconsumption expenditure
II. Real convergence
Public policies make a difference
Source: European Commission
29.1
24.5
39.2
30.6
59.9
41.7
45.8
59.0
28.2
21.7
48.3
20
25
30
35
40
45
50
55
60
65
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
GDP per capita in PPS(% of average for Germany and France)
Bulgaria Poland Hungary Romania
Note: Estimates for the year 2014
Real convergence: not a one way street
Source: European Commission
50
60
70
80
90
100
110
120
130
140
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
GDP per capita in PPS(% of average for Germany and France)
Italy Ireland Portugal Spain Greece
Euro area enlargement: euro adoptedrecently only by small countries
Source: European Commission, Eurostat
0
2
4
6
8
10
12
14
Ma
lta
Cy
pru
s
Esto
nia
Latv
ia
Slo
ven
ia
Slo
vak
ia
Ro
ma
nia
Lith
ua
nia
Bu
lga
ria
Hu
ng
ary
Cze
ch R
epu
blic
Po
lan
d
Po
rtu
ga
l
Gre
ece
Spa
in
Stable population in 2013 (% of Euro area)
Gross domestic Product in 2013 (% of Euro area)
Euro adoption years:
2007: Slovenia
2008: Malta, Cyprus
2009: Slovakia
2011: Estonia
2014: Latvia
2015: Lithuania
Euro area enlargement: deep foreign tradeintegration for Euro area late comers
Source: European Commission, Eurostat, Raiffeisen RESEARCH
0
20
40
60
80
100
120
Spa
in
Po
rtu
ga
l
Gre
ece
Slo
ven
ia
Cy
pru
s
Ma
lta
Slo
vak
ia
Esto
nia
Latv
ia
Ro
ma
nia
Lith
ua
nia
Bu
lga
ria
Hu
ng
ary
Cze
ch R
epu
blic
Po
lan
d
1999 2001 2007 2008 2008 2009 2011 2013 2013 2013
Exports of goods and services (% of GDP)
Exports towards EU member countries (% of GDP)* Exports towards non EU member countries (% of GDP)*
Total exports of goods and services in 2013 (% of GDP)
* computed in the year of Euro adoption for new Euro area member countries and in 2013 for non Euro area member countries
Euro area enlargement: high GDP per capitaat the moment of euro adoption
Source: Eurostat, Raiffeisen RESEARCH
81
6775 78
89
7264
59 57 58
Spa
in
Po
rtu
ga
l
Gre
ece
Slo
ven
ia
Cy
pru
s
Ma
lta
Slo
vak
ia
Esto
nia
Latv
ia
Lith
ua
nia
1999 2001 2007 2008 2008 2009 2011 2014 2015
GDP per capita in PPS as % of Germany+Francein the year of accession in Euro area
Real convergence in Romania by 2019:some scenarios
Source: European Commission, Eurostat, own computation
Real GDP should grow by at least 4% onaverage per year to be in Scenario 2.
Reference period Romania Germany+France2001-2008 12.2 3.02001-2014 8.3 2.32006-2014 7.3 2.02009-2014 3.2 1.32011-2014 4.6 2.0
Scenarios for period 2015-2019
GDP per capita inRomania in 2019 (% of
Germany and France)
Scenario 1 4.5 2.0 55Scenario 2 6.0 2.0 59Scenario 3 7.0 2.0 61
GDP per capita at PPS (%yoy, average for period)
48 55
5961
20
30
40
50
60
70
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
GDP per capita at PPS in Romania(% of Germany+France)
Scenario 1: +3.0% pe year growth in GDP per capita at PPS
Scenario 2: +4.5% pe year growth in GDP per capita at PPS
Scenario 3: +6.0% pe year growth in GDP per capita at PPS
III. Recent economic growthdevelopments
A booming economy before the crisis
Source: Eurostat
BG
CZ
EE
LVLT
HU
PL
RO
SI
SKHR
2
3
4
5
6
7
8
9
10
2 4 6 8 10
An
nu
al g
row
th r
ate
fo
r d
om
esti
c d
ema
nd
(ave
rag
e 2
00
1-2
00
8)
Annual growth rate for real GDP (average2001-2008)
GDP growth drivenby domesticdemand
GDP growth drivenby exports
1.82.1
3.3
4.04.3 4.3
5.76.0 6.2
6.5
7.4 7.5
EA
EU 2
7
HU PL
HR
CZ
BG EE SK RO LV LT
Annual average GDP growth(2001-2008)
Scarce net inflows of foreign capital toprivate sector, slow recovery pace
Source: National Bank of Romania, National Institute of Statistics
Note: net inflows of foreign capital in the private sector; portfolio inflows excluded
-9
-6
-3
0
3
6
9
12
02
Q4
03
Q4
04
Q4
05
Q4
06
Q4
07
Q4
08
Q4
09
Q4
10
Q4
11
Q4
12
Q4
13
Q4
14
Q4
e
Real GDP excluding agriculture (% yoy)
7.8% per year
2.6% per year
-10
-5
0
5
10
15
20
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
e
Net FDIs (% of GDP)
Net loans, deposits (% of GDP)
Total inflows of foreign capital in private sector (% of GDP)
Less room to use indebtedness to leverageeconomic growth
Source: European Commission, Eurostat, Raiffeisen RESEARCH
0
10
20
30
40
50
60
70
80
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e
GDP per capita at PPS in Romania (% of Germany+France)Gross external debt (% of GDP)Gross public debt (% of GDP)
Pre-crisis imbalances had to be adjusted
Source: Eurostat, National Bank of Romania, European Commission,
-16
-14
-12
-10
-8
-6
-4
-2
0
2
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
F
Foreign trade balance, goods&services (% of GDP)
Current account balance (% of GDP)
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
F
Public budget balance (ESA 2010, % of GDP)
Structural public budget balance (% of GDP)
Sharp contraction in domestic demandfollowed by a modest recovery
Source: National Institute of Statistics, Raiffeisen RESEARCH
60
70
80
90
100
110
120
130
140
150
20
08
20
09
20
10
20
11
20
12
20
13
20
14
e
GDP and demand (2008=100)
Private consumption
Gross fixedcapital formation
GDP excludingagriculture
Exports
Signs of revival in households spending
Source: National Institute of Statisitcs, European Commission, RaiffeisenRESEARCH
Note: normalized levels (deviation from meanrelative to standard deviation); 3-month movingaverages
Note: 3-months moving averages
90
100
110
120
130
Dec
-14
Dec
-13
Dec
-12
Dec
-11
Dec
-10
Dec
-09
Dec
-08
Retail sales(deflated turnover, 2010=100)
Non-foods, excluding fuels Foods
Fuels Total retail sales
-3
-2
-1
0
1
2
3
Jan
-15
Jan
-14
Jan
-13
Jan
-12
Jan
-11
Jan
-10
Jan
-09
Jan
-08
Jan
-07
Jan
-06
Jan
-05
Consumer confidence index
Euro area CEE 4 countries Romania
Increasing volatility on the external markets
Source: Bloomberg, Raiffeisen RESEARCH
10
12
14
16
18
20
22
24
Feb
-13
Ap
r-1
3
Jul-
13
Sep
-13
No
v-1
3
Jan
-14
Ma
r-1
4
Ma
y-1
4
Jul-
14
Sep
-14
Dec
-14
Feb
-15
VIX index
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Feb
-14
Ap
r-1
4
Ma
y-1
4
Jul-
14
Au
g-1
4
Oct
-14
No
v-1
4
Jan
-15
Feb
-15
Yields for US and German T-securities
US 5Y US 10YGermany 5Y Germany 10Y
Deleveraging under way
Source: National Bank of Romania, Raiffeisen RESEARCH
0%
5%
10%
15%
20%
25%
30%
35%
40%
04Q4 06Q4 08Q4 10Q4 12Q4 14Q4e
Gross external debt, by sectors
Central bank and government (% of GDP)Banking system (% of GDP)Private non-banking sector (% of GDP)
0
5
10
15
20
25
04Q4 06Q4 08Q4 10Q4 12Q4 14Q4e
Stock of banking loans, by sectors
Consumer loans (% of GDP)Housing loans (% of GDP)Banking loans for individuals (% of GDP)Banking loans for companies (% of GDP)
GDP growth in 2015 to be supported by: Improving activity on external markets Lower constrains stemming from the fiscal side Further progress in absorption of EU funds Low levels of RON and EUR lending rates Lower risk premium as a result of low
macroeconomic imbalances
Main risks and challenges Risks stemming from politics have reduced but
uncertainty on policies has preserved - increasingrisks for fiscal slippages
Potential increase in risk aversion of investorstowards EM assets
A bad agricultural year (increase in inflation rate,ROBOR rates and RON yields, lower GDPdynamics)
Better prospects for GDP growth, buthigher growth is strongly needed
Source: National Institute of Statistics, Raiffeisen RESEARCH
-8
-6
-4
-2
0
2
4
6
8
10
12
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
E
20
15
E
20
16
E
Real GDP excluding agriculture (% yoy)
Low level of competitiveness
Source: The Global Competitiveness report, World Economic Forum, 2014-2015
Note: Red lines denote scores for Romania
World Economic Forum World Competitiveness Report – Ranking(out of 144 countries)
Source: The Global Competitiveness report, World Economic Forum, 2014-2015
Romania Bulgaria Czech Republic Hungary Poland Slovak Republic 7.05 Effect of taxation on incentives to work, 1-7 (best) 140 91 110 128 88 119 6.04 Effect of taxation on incentives to invest, 1-7 (best) 128 81 107 133 102 114 7.08 Country capacity to retain talent, 1-7 (best) 128 142 80 122 117 130 7.07 Reliance on professional management, 1-7 (best) 126 113 47 114 71 74 7.01 Cooperation in labor-employer relations, 1-7 (best) 125 111 52 71 100 105 2.02 Quality of roads, 1-7 (best) 121 106 81 58 89 82 6.01 Intensity of local competition, 1-7 (best) 120 75 17 47 51 32 6.09 Prevalence of trade barriers, 1-7 (best) 117 99 72 30 66 38 1.08 Wastefulness of government spending, 1-7 (best) 116 98 7 96 85 126 7.09 Country capacity to attract talent, 1-7 (best) 115 142 93 118 124 117 1.07 Favoritism in decisions of government officials, 1-7 (best) 114 134 106 122 67 141 4.10 Primary education enrollment, net %* 114 66 55 95 49 n/a 1.17 Ethical behavior of firms, 1-7 (best) 112 101 94 96 57 123 1. Corporate ethics 112 101 94 96 57 123
…. 5.06 Internet access in schools, 1-7 (best) 53 45 27 35 50 31 2.09 Fixed telephone lines/100 pop.* 52 42 63 37 78 68 9.03 FDI and technology transfer, 1-7 (best) 49 91 36 19 68 18 6.07 No. days to start a business* 48 84 92 14 111 87 1.21 Strength of investor protection, 0–10 (best)* 45 45 83 105 45 98 10.01 Domestic market size index, 1–7 (best)* 44 66 48 56 20 61 9.05 Fixed broadband Internet subscriptions/100 pop.* 40 39 41 31 46 47 6.06 No. procedures to start a business* 32 22 106 22 22 78 5.04 Quality of math and science education, 1-7 (best) 31 54 74 60 50 75 9.06 Int’l Internet bandwidth, kb/s per user* 19 27 25 75 37 93 8.08 Legal rights index, 0–10 (best)* 11 11 63 43 11 29 7.04 Redundancy costs, weeks of salary* 7 21 95 61 89 89
WOR
STBE
ST
World Bank Doing Business Report – Ranking (out of 189 countries)
Source: World Bank Doing Business 2015 Report
Starting aBusiness
Registering Property
GettingCredit
ProtectingMinorityInvestors
TradingAcross
Borders
EnforcingContracts
Rank RankTime
(days)Rank
Time(days)
Cost (%of
incomeper
capita)
Rank Rank Rank RankPayments(numberper year)
Time(hours per
year)
Total taxrate (%profit)
Rank Rank RankTime
(years)
Recoveryrate
(cents onthe dollar)
United States 7 46 41 78.6 61 89.6 25.5 29 2 25 47 10.6 175 43.8 16 41 4 1.5 80.4Germany 14 114 8 96 3 28 44.4 89 23 51 68 9 218 48.8 18 13 3 1.2 83.4Poland 32 85 137 212 64 161 20.8 39 17 35 87 18 286 38.7 41 52 32 3 57Slovak Republic 37 77 110 286 100 128 56.9 11 36 100 100 20 207 48.6 71 55 31 4 54.4Bulgaria 38 49 101 110 125 130 320.4 57 23 14 89 13 454 27 57 75 38 3.3 33.2Czech Republic 44 110 139 143 123 129 175.8 31 23 83 119 8 413 48.5 58 37 20 2.1 65.6Romania 48 38 140 255 171 223 496.1 63 7 40 52 14 159 43.2 65 51 46 3.3 30.7Slovenia 51 15 90 212.5 31 38 119.3 90 116 14 42 11 260 32 53 122 42 2 50.1Hungary 54 57 103 91 162 252 111.5 52 17 110 88 11 277 48 72 20 64 2 40.2
Resolving InsolvencyPaying Taxes
Economy
Ease ofDoing
BusinessRank
Dealing withConstruction
PermitsGetting Electricity
World Bank Doing Business Report – Paying taxes, ranking (out of189 countries)
Source: World Bank Doing Business 2015 Report
Economy Rank Payments (number per year) Time (hours per year) Profit tax (%) Labor tax and contributions (%) Other taxes (%) Total tax rate (% profit)Ireland 6 9 80 12.4 12.1 1.4 25.9Denmark 12 10 130 20.3 3 2.8 26Bulgaria 89 13 454 5 20.2 1.7 27Switzerland 18 19 63 9.5 17.7 1.8 29Slovenia 42 11 260 12.5 18.2 1.4 32United Kingdom 16 8 110 20.9 11.3 1.5 33.7Europe & Central Asia .. 20.5 234.3 10.4 21.4 3.1 34.9Poland 87 18 286 13.1 24.7 1 38.7Netherlands 23 9 123 21.1 17.6 0.4 39Norway 15 4 83 24.8 15.9 0 40.7OECD high income .. 11.8 175.4 16.4 23 1.9 41.3Portugal 64 8 275 15.1 26.8 0.5 42.4Romania 52 14 159 10.7 31.5 1 43.2United States 47 10.6 175 28.2 9.7 6 43.8Hungary 88 11 277 11.8 34.3 1.8 48Czech Republic 119 8 413 7.6 38.4 2.6 48.5Slovak Republic 100 20 207 8.5 39.7 0.4 48.6Germany 68 9 218 23.3 21.2 4.3 48.8
Source: National Institute of Statistics, Raiffeisen RESEARCH.
Economic activity concentrated in a small number of counties
TR
B
GRCL
DJ
IF
CT
IL
OT
MH
GJ DB
PH BR TLVL AGCS
BZ
BV GLVNTMSB CV
HD
AB
ARBC
VSMS HR
NTCJ
SJ BN IS
BH
SVMMSM
BT
Nominal GDP per capita (2011, % of country average)
<= 50%
(50%, 75%]
(75%, 100%]
(100%, 125%]
(125%, 150%]
> 150%
Only 5 counties produce more than 40% of GDP.
Source: Ministry of Finance, Raiffeisen RESEARCH.
Large companies are concentrated even more
Over 50% of large companies are located in 5 counties.
TR
B
GRCL
DJ
IF
CT
IL
OT
MH
GJ DB
PH BR TLVL AGCS
BZ
BV GLVNTMSB CV
HD
AB
ARBC
VSMS HR
NTCJ
SJ BN IS
BH
SVMMSM
BT
Number of companies with net turnover above EUR 5 mn. (2012)
<= 50
(50, 100]
(100, 150]
(150, 200]
(200, 250]
> 250