The economic growth rate continues to be high in Romania. After the 3.7% contraction in 2020, the economy has made a strong recovery, growing by 5.8% in 2021. Preliminary figures point to a better-than-expected 4.8% growth in 2022, as a result of strong domestic demand. Just as in the second half of 2021, private consumption continued to be the main driver of economic growth in the second half of 2022 as well, while gross fixed capital formation had a bigger contribution in the second half of 2022, on account of decreased consumption. This advance in the economy occurred despite the decline, in real terms, of the purchasing power of consumers. The increase in energy prices in 2022 was an important contributor to the accelerated increase of inflation, which reached 16% at the end of the year, and was consequently above the increase rate of the net nominal salary of only 12%.
Activity in the services sector also continued to have a dynamic evolution in 2022. The construction sector also grew, partly due to the base effect, after the weaker performance in 2021, contributing 0.7 percent to GDP growth. Industrial production, on the other hand, suffered a contraction influenced by the conditions of an uncertain climate as a result of geopolitical tensions, blockages in production chains and rising prices of raw materials and fuel. The agricultural sector also had a weak 2022, influenced by drought and year-to-year increases in fertilizer and energy prices. Both industry and agriculture had a negative contribution of -0.5 percentage points to GDP in 2022.
The upward trend in inflation, which began in 2021 with the
recovery of the economy after the post-Covid period, gained
momentum in 2022, when it was exacerbated by the increases in
the prices of energy and raw materials, as a result of the
conflict in Ukraine. Rising inflation determined the National
Bank of Romania to increase the central bank policy rate several
times during 2022.
The budgetary consolidation process continued in 2022, supported by the better-than-expected evolution of the economy. The budget deficit decreased to -5.7% of GDP from -6.7% in the previous year, in the context in which certain categories of expenses, in this case public investments, were below the target level.
Public debt remained moderate in relation to European Union standards, despite massive government borrowing in 2020, reaching 48.9% of GDP at the end of 2021. The latest data from the Ministry of Public Finance shows a marginal decrease by November 2022 to 48.3% of GDP.
At the same time, external public debt continued to increase in 2021. While in 2019, it was 16.3% of GDP, it reached 23.8% in 2020, increasing to over 24% of GDP in 2021 amid the need for diversified financing of the budget deficit and more favourable external interest rates.
In terms of maturities, over 95% of the public debt had medium and long-term maturities at the end of 2021, remaining around this level in 2022 as well. Short-term debt (with maturities of up to one year) was around 4.6-5% of the total public debt.
The rapid recovery of the economy in 2021 caused blockages in production and distribution chains, generating an increase in inflation. Consequently, the National Bank of Romania (NBR) reacted by increasing its policy rate from the historical minimum of 1.25% to 1.75% towards the end of the year. The increase in inflation gained momentum in 2022 also against the background of rising energy and food prices. The acceleration of inflation and the need for harmonisation with the other European central banks, including with the European Central Bank, in order to maintain an adequate interest differential and avoid significant depreciation of the national currency, led to a significant increase in the monetary policy interest rate, which reached 6.75% at the end of 2022, generating chain reactions on all other rates in the banking system.
Thus, the signal given by the central bank through the gradual increase in the monetary policy interest rate led to increases in the 3- and 12-month ROBOR. These increases had effects on new loans and deposits granted to households and non-financial companies.
For example, for new deposits attracted from the population, the average interest rates increased from 1.3% in November 2021 to over 7% one year later, while for loans in the same period, the increase was from 6.1% to 9.79%. In the case of non-financial companies, the lending conditions became even more tightened, with the interest rate increasing for new loans from 4.67% in November 2021 to 10.3% in November 2022, and for deposits attracted from companies, the increase was from 1.86% to 6.83% in the same period.
In terms of external balances, the current account deficit continues to increase, against the background of the increase in the trade balance deficit. The current account deficit is estimated to have reached over 9% of GDP in 2022.
In nominal terms, Romania finished 2022 with a current account deficit of over EUR 26.5 billion, against the background of a deficit in the balance of goods and services of almost 20 billion (a deficit of EUR 32.3 billion in the case of the balance of goods and a 12.5 billion surplus of the balance of services) according to NBR data.
At the same time, the primary income balance recorded a deficit of almost EUR 8.7 billion, while the secondary income balance showed a surplus of 1.9 billion in 2022 as well, after a surplus of almost EUR 1 billion in 2021. At the end of 2022, the total external debt represented EUR 142.7 billion, of which 57.65 billion belonged to the public administration (mostly debt securities and loans). At the same time, out of the 142.7 billion, direct investment in the form of intra-group loans represented 43.5 billion.
The Bucharest equity market has performed well since April 2020, with good results (in terms of growth and return) including in comparison with Romania’s neighbours in the region. The Bucharest Stock Exchange fell by around 16% in March 2020, amid the financial shock in world markets caused by the COVID-19 pandemic. Following the upgrade to emerging market status in September 2020 and extra liquidity in the financial sector, the index increased significantly until the first part of 2022. Afterwards, due to the tensions created by the war in Ukraine, the energy crises, as well as the high inflation that led to a restrictive monetary policy, a generally downward trend followed and lasted until the end of the year.
Even though the RON has been steadily weakening against the Euro over the past few years, in 2022 it was much more stable compared to the other currencies in the region, where volatility was more pronounced, especially in Hungary. This stability has been maintained despite the significant pressures that characterize Romania’s economy, i.e. the existence of twin deficits (the budget deficit and the current account deficit), as well as the context of high inflation, where the capacity and control of liquidity by the central bank were decisive.
With the exception of two important periods in recent years, when the national currency depreciated (at the same pace as other currencies in the region) – i.e. in March 2020, when the COVID-19 pandemic started and the financial markets panicked, and also in February 2022, as a result of the outbreak of the war in Ukraine – during most of the 2019-2022 period, the EUR/RON exchange rate proved relatively stable, even with slight appreciation tendencies after the central bank decided to start the monetary policy interest rate increase process, in the first half of 2022.
The banking sector has remained well-capitalized over the past few years. The degree of financial intermediation – expressed by the share of the banking sector’s assets in GDP – is low, at just over 52% of GDP, much lower than in other countries in the region, such as Bulgaria and Poland, where the share is almost double, close to 95%.
The non-performing loan (NPL) ratio has remained low over the past two years, even though following the interest rate increases, the risk of a future increase in the non-performing loan ratio remains relatively high. Furthermore, the degree of coverage of NPLs with provisions is high, above the EU average, at over 65% in September 2022 (compared to the EU average of 44%). The non-performing loan ratio is higher among households as compared to non-financial companies.
It is important that the policy mix should have a balanced approach, in order to avoid the accentuation of imbalances at macroeconomic level. Fiscal policy will have to support monetary policy in combatting inflation while, at the same time, efforts need to be continued to reduce the budget deficit. Medium-term fiscal consolidation should also support private investment, as a driver of future economic growth.
Attracting European funds, as well as financing from the National Recovery and Resilience Plan, should be a priority to support structural reforms and investments in key areas (digitalisation, transport, health, education, energy, etc.).
Economic growth outlook for Romania
| 2023 | 2024 | |
| European Commission | 2.5 | 3 |
| International Monetary Fund | 3.1 | 3.8 |
| World Bank | 2.6 | 4.2 |
| European Bank for Reconstruction and Development | 1.7 | 3.3 |
| The National Strategy and Forecast Commission | 2.8 | 4.8 |
On account of an unfavourable external climate dominated by inflation, quasi-stagnation in the European Union’s economy as a whole, as well as higher financing costs, demand from the main export markets (mainly the Euro area countries) is expected to be relatively low.