Financial stability has remained robust since the release of the previous Report (June 2018), and the main vulnerabilities have continued to be those stemming from external sources. The National Bank of Romania has further pursued a counter-cyclical policy conduct within its scope of activity, yet a balanced economic policy mix is called for in order to adequately manage the vulnerabilities with systemic potential and achieve sustainable economic growth according to the latest Financial Stability Report for December published by the National Bank of Romania on 10th of December 2018.
As shown in the Report, the domestic macroeconomic and financial environment has remained favourable, which has helped provide some kind of protection to Romania, together with the other countries in the region, at times when global investor sentiment towards the emerging markets worsened. Romania’s key strengths have been as follows:
- The risk of overheating for the local economy has receded. Economic growth slowed from 6.9 percent in 2017 to 4.1 percent in 2018 H1. In turn, the annual inflation rate is expected to strengthen its downward path after reaching a peak at mid-year, as it is seen re-entering the variation band of the target (2.5 percent ± 1 percentage point) at end – 2018 and running in the upper half of the band during 2019.
- Public debt contracted by one percentage point against the end of 2017, coming in at 34.1 percent of GDP at end -June 2018, amid robust economic growth. It remained below the ceiling of 60 percent set forth in the European Commission’s assessment procedure as well as below the sustainability threshold estimated at 40-45 percent. Nevertheless, the MPF’s forex reserve declined to 2.8 percent of GDP at end-2017, which puts the net public debt close to the gross public debt.
- Unemployment rate continued to fall to 4.2 percent in 2018 Q3, while the employment rate further followed the improving trend seen in previous periods, standing at 70 percent in 2018 Q2, close to the 75 percent benchmark set as an objective under the Europe 2020 strategy.
- The banking sector has stayed sound. Solvency and liquidity remained within adequate parameters and asset quality improved (the non-performing loan ratio dropped from 6.41 percent in December 2017 to 5.56 percent in September 2018).
On the whole, Romania is better prepared now than it was 10 years ago to withstand external shocks, as:
- Foreign currency reserves strengthened, growing from EUR 27.3 billion in October 2008 to EUR 32.4 billion in October 2018. Banks in Romania came to be much less dependent on foreign funding (the share of foreign liabilities in total liabilities narrowed from 30.7 percent in December 2008 to 9.1 percent in September 2018, with the adjustment proceeding in an orderly fashion).
- The public debt refinancing risk declined, the share of short-term debt in general government debt narrowing markedly over the past 10 years, from 18 percent in 2008 to 2.7 percent in August 2018. Moreover, the average maturity of government debt rose in recent years, coming in at 6.2 years in August 2018.
- Net external debt as a share in GDP hit a 10-year low of 19.5 percent in 2018 H1, against 24 percent in the same period of 2008.
- The financial system has gained in soundness. Over the past decade, the Romanian banking sector: (i) consolidated its solvency, and no bail-out was needed, (ii) maintained adequate levels of liquidity indicators, (iii) recorded one of the fastest declines in the non-performing loan ratio Europe-wide, (iv) saw a gradual improvement in profitability, after the recognition of heavy losses from credit risk (in 2010, 2011, 2012 and 2014), and (v) mitigated the vulnerability associated with currency risk by sizeably reducing the share of on-balance sheet forex loans.
For further information: December Financial Stability Report