Macro: COVID-19 Update Romania: Better than expected economic performance in Q2, but fiscal slippage widens

In Romania, once the lockdown restrictions started to be eased the economic activity returned to its previously upward trend in mid-May. During May-June the retail sales rebounded unexpectedly rapidly, reaching the prepandemic levels and highlighting the vigorous recovery in household consumption spending. Also, industrial output performed better than expected. At the same time, the improvement of international trade led to a decline for both the foreign trade deficit and the current account deficit in May-June. Even so, the data released by the National Institute of Statistics revealed a smaller decline in real GDP (-12.3% qoq and -10.6 yoy) than expected. The increases of confidence indicators in May and June strengthened the signals of a less pronounced contraction of real GDP in Q2 than anticipated. Moreover, the Economic Sentiment Index continued its uptrend in July suggesting the continuation of economic growth in the third quarter. We have also revised upwards our GDP forecast for 2020 to -5% from -7% previously.
Going forward, we see real GDP increasing only by 4.2% in 2021 and returning to its Q4 2019 level only by the end of 2022. Furthermore, Romanias access to the funds allocated within the Next Generation EU (NGEU) instrument will play an important role for the economic recovery in the coming years. Romania is to receive EUR 33.5bn from the NGEU fund, split into EUR 16.8 bn in grants and EUR 16.7 bn in loans.
The COVID-19 outbreak triggered a sharp increase of the public budget deficit during January-June, to a level of 4.2% of the annual official GDP projection. In this context, financing this year's very large public budget deficit remains difficult, though improving sentiment on the external markets and the decisions of the three major rating agencies to maintain the sovereign rating allowed Romania to tap external markets both in May and in July.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.