Romania nominal and real convergence on the way to euro adoption Ionut Dumitru President of the Fiscal Council and Chief-economist, Raiffeisen Bank Romania February 2015
Eurozone enlargement current status Initial target Date of setting the target Current target Bulgaria 2010 2004 no target date Croatia 2019 no target date Czech Republic 2009/2010 2003 no target date Hungary 2008 2003 no target date Lithuania 2007 2004 2015 Poland 2008/2009 2003 no target date Romania 2014 2007 2019 Denmark no target not obliged to join Sweden no target de facto opt-out United Kingdom no target not obliged to join Source: European Commission
I. Nominal convergence. Maastricht criteria
Nominal convergence: Maastricht criteria 1. Inflation the achievement of a high degree of price stability; a Member State has a price performance that is sustainable and an average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1.5 percentage points that of, at most, the three best performing Member States in terms of price stability. 2. Long-term interest rate developments observed over a period of one year before the examination, a Member State has had an average nominal long-term interest rate that does not exceed by more than two percentage points that of, at most, the three best performing Member States in terms of price stability. Interest rates shall be measured on the basis of long-term government 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 government budgetary 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 mechanism Member State has respected the normal fluctuation margins [+/-15%] provided for by the exchange rate mechanism on the European Monetary System without severe tensions for at least the last two years before the examination Source: European Commission
Sustainability of public financial position 0-1 -2-3 Public budget balance (% of GDP) Maastricht criteria: -3.0% of GDP 70 60 50 Gross public debt (% of GDP) Maastricht criteria: 60% of GDP -4-5 40 Romania's EU accession >>> -6-7 Romania's EU accession >>> 30 20-8 -9-10 2001 2002 2003 2004 2005 2006 2009-2013: EDP in place 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F Note: European Commission (Feb 2015) Source: European Commission
Inflation and long-term interest rates 14 12 Assesment of Maastricht Criteria on inflation 10 Assesment of Maastricht Criteria on interest rates (10-year LCY yields) 10 8 8 6 6 4 4 2 2 0 0 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Maastricht reference criteria as computed by the ECB/EC Maastricht reference criteria - own estimates Annual inflation rate in Romania (% yoy, average 12-months) 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 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. Source: European Commission, European Central Bank
Achieving the inflation criterion is a difficult task 3.6 Average annual inflation rate (from Dec 2009 to Dec 2014) - 10 largest advances 3.0 2.7 2.6 46 51 Level of consumer prices in 2013 (% of Euro area 15), 10 lowest levels 52 56 60 63 65 65 67 73 EU 28 average = 1.8% 2.3 2.3 2.1 1.9 1.9 1.9 RO EE HU UK FI AT LT MT LU PL Bulgaria Romania Poland Hungary Lithuania Croatia Czech Rep. Slovakia Latvia Estonia Note: level of consumer prices is computed based on household final consumption expenditure Source: Eurostat
II. Real convergence
Public policies make a difference 65 GDP per capita in PPS (% of average for Germany and France) 60 55 50 45.8 59.9 59.0 48.3 45 40 41.7 39.2 35 30 30.6 29.1 25 20 28.2 24.5 21.7 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Bulgaria Poland Hungary Romania Note: Estimates for the year 2014 Source: European Commission
Real convergence: not a one way street 140 GDP per capita in PPS (% of average for Germany and France) 130 120 110 100 90 80 70 60 50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Italy Ireland Portugal Spain Greece Source: European Commission
Euro area enlargement: euro adopted recently only by small countries 14 12 10 8 6 4 Euro adoption years: 2 2007: Slovenia 0 2008: Malta, Cyprus Malta Cyprus Estonia Latvia Slovenia Slovakia Romania Lithuania Bulgaria Hungary Czech Republic Poland Portugal Greece Spain 2009: Slovakia 2011: Estonia 2014: Latvia Stable population in 2013 (% of Euro area) Gross domestic Product in 2013 (% of Euro area) 2015: Lithuania Source: European Commission, Eurostat
Euro area enlargement: deep foreign trade integration for Euro area late comers 120 Exports of goods and services (% of GDP) 100 80 60 40 20 0 Spain Portugal Greece Slovenia Cyprus Malta Slovakia Estonia Latvia Romania Lithuania Bulgaria Hungary Czech Republic Poland 1999 2001 2007 2008 2008 2009 2011 2013 2013 2013 Exports towards EU member countries (% of GDP)* Total exports of goods and services in 2013 (% of GDP) Exports towards non EU member countries (% of GDP)* * computed in the year of Euro adoption for new Euro area member countries and in 2013 for non Euro area member countries Source: European Commission, Eurostat, Raiffeisen RESEARCH
Euro area enlargement: high GDP per capita at the moment of euro adoption GDP per capita in PPS as % of Germany+France in the year of accession in Euro area 89 81 67 75 78 72 64 59 57 58 Spain Portugal Greece Slovenia Cyprus Malta Slovakia Estonia Latvia Lithuania 1999 2001 2007 2008 2008 2009 2011 2014 2015 Source: Eurostat, Raiffeisen RESEARCH
Real convergence in Romania by 2019: some scenarios GDP per capita at PPS (% yoy, average for period) Reference period Romania Germany+France 2001-2008 12.2 3.0 2001-2014 8.3 2.3 2006-2014 7.3 2.0 2009-2014 3.2 1.3 2011-2014 4.6 2.0 70 60 50 GDP per capita at PPS in Romania (% of Germany+France) 48 61 59 55 Scenarios for period 2015-2019 GDP per capita in Romania in 2019 (% of Germany and France) 40 Scenario 1 4.5 2.0 55 Scenario 2 6.0 2.0 59 Scenario 3 7.0 2.0 61 30 20 Real GDP should grow by at least 4% on average per year to be in Scenario 2. 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 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 Source: European Commission, Eurostat, own computation
III. Recent economic growth developments
A booming economy before the crisis 1.8 2.1 Annual average GDP growth (2001-2008) 3.3 4.0 4.3 4.3 5.7 6.0 6.2 6.5 7.4 7.5 Annual growth rate for domestic demand (average 2001-2008) 10 9 8 7 6 5 4 3 2 GDP growth driven by domestic demand HU PL HR SI CZ BG RO EE SK LV LT GDP growth driven by exports EA EU 27 HU PL HR CZ BG EE SK RO LV LT 2 4 6 8 10 Annual growth rate for real GDP (average 2001-2008) Source: Eurostat
Scarce net inflows of foreign capital to private sector, slow recovery pace 20 15 12 9 7.8% per year 10 5 0 6 3 0 2.6% per year -5-3 -10 2000 2001 2002 2003 2004 2005 Net FDIs (% of GDP) 2006 2007 2008 2009 2010 2011 2012 2013 2014e -6-9 Net loans, deposits (% of GDP) Total inflows of foreign capital in private sector (% of GDP) 02Q4 03Q4 04Q4 05Q4 06Q4 07Q4 08Q4 09Q4 10Q4 11Q4 12Q4 13Q4 Real GDP excluding agriculture (% yoy) 14Q4e Note: net inflows of foreign capital in the private sector; portfolio inflows excluded Source: National Bank of Romania, National Institute of Statistics
Less room to use indebtedness to leverage economic growth 80 70 60 50 40 30 20 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e GDP per capita at PPS in Romania (% of Germany+France) Gross external debt (% of GDP) Gross public debt (% of GDP) Source: European Commission, Eurostat, Raiffeisen RESEARCH
Pre-crisis imbalances had to be adjusted 0 2-1 0-2 -3-4 -5-6 -7-2 -4-6 -8-10 -8-12 -9-14 -10-16 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014F Public budget balance (ESA 2010, % of GDP) Structural public budget balance (% of GDP) Foreign trade balance, goods&services (% of GDP) Current account balance (% of GDP) Source: Eurostat, National Bank of Romania, European Commission,
Sharp contraction in domestic demand followed by a modest recovery 150 GDP and demand (2008=100) 140 Exports 130 120 110 100 90 80 70 60 GDP excluding agriculture Private consumption Gross fixed capital formation 2008 2009 2010 2011 2012 2013 2014e Source: National Institute of Statistics, Raiffeisen RESEARCH
Signs of revival in households spending Retail sales (deflated turnover, 2010=100) Consumer confidence index 3 130 2 120 1 110 0-1 100-2 90-3 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Non-foods, excluding fuels Fuels Foods Total retail sales Euro area CEE 4 countries Romania Note: 3-months moving averages Note: normalized levels (deviation from mean relative to standard deviation); 3-month moving averages Source: National Institute of Statisitcs, European Commission, Raiffeisen RESEARCH
Increasing volatility on the external markets 24 VIX index 3.0 Yields for US and German T-securities 22 2.5 20 18 2.0 1.5 1.0 16 0.5 14 0.0 12-0.5 10 Feb-13 Apr-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Dec-14 Feb-15 Feb-14 Apr-14 May-14 US 5Y Germany 5Y Jul-14 Aug-14 Oct-14 Nov-14 Jan-15 US 10Y Germany 10Y Feb-15 Source: Bloomberg, Raiffeisen RESEARCH
Deleveraging under way 40% Gross external debt, by sectors 25 Stock of banking loans, by sectors 35% 20 30% 25% 15 20% 10 15% 10% 5 5% 0% 04Q4 06Q4 08Q4 10Q4 12Q4 14Q4e Central bank and government (% of GDP) Banking system (% of GDP) Private non-banking sector (% of GDP) 0 04Q4 06Q4 08Q4 10Q4 12Q4 14Q4e Consumer loans (% of GDP) Housing loans (% of GDP) Banking loans for individuals (% of GDP) Banking loans for companies (% of GDP) Source: National Bank of Romania, Raiffeisen RESEARCH
Better prospects for GDP growth, but higher growth is strongly needed 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 12 10 8 6 4 2 Real GDP excluding agriculture (% yoy) Main risks and challenges 0 Risks stemming from politics have reduced but uncertainty on policies has preserved - increasing risks for fiscal slippages Potential increase in risk aversion of investors towards EM assets -2-4 -6-8 A bad agricultural year (increase in inflation rate, ROBOR rates and RON yields, lower GDP dynamics) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Source: National Institute of Statistics, Raiffeisen RESEARCH
Low level of competitiveness Note: Red lines denote scores for Romania Source: The Global Competitiveness report, World Economic Forum, 2014-2015
World Economic Forum World Competitiveness Report Ranking (out of 144 countries) WORST BEST 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 Source: The Global Competitiveness report, World Economic Forum, 2014-2015
World Bank Doing Business Report Ranking (out of 189 countries) Ease of Doing Business Starting a Business Rank Dealing with Construction Permits Rank Time (days) Getting Electricity Rank Time (days) Cost (% of income per capita) Registerin g Property Getting Credit Protecting Minority Investors Rank Rank Rank Rank Payments (number per year) Paying Taxes Time (hours per year) Total tax rate (% profit) Trading Across Borders Enforcing Contracts Rank Rank Rank Resolving Insolvency Time (years) Recovery rate (cents on the dollar) Economy Rank 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 80.4 Germany 14 114 8 96 3 28 44.4 89 23 51 68 9 218 48.8 18 13 3 1.2 83.4 Poland 32 85 137 212 64 161 20.8 39 17 35 87 18 286 38.7 41 52 32 3 57 Slovak Republic 37 77 110 286 100 128 56.9 11 36 100 100 20 207 48.6 71 55 31 4 54.4 Bulgaria 38 49 101 110 125 130 320.4 57 23 14 89 13 454 27 57 75 38 3.3 33.2 Czech Republic 44 110 139 143 123 129 175.8 31 23 83 119 8 413 48.5 58 37 20 2.1 65.6 Romania 48 38 140 255 171 223 496.1 63 7 40 52 14 159 43.2 65 51 46 3.3 30.7 Slovenia 51 15 90 212.5 31 38 119.3 90 116 14 42 11 260 32 53 122 42 2 50.1 Hungary 54 57 103 91 162 252 111.5 52 17 110 88 11 277 48 72 20 64 2 40.2 Source: World Bank Doing Business 2015 Report
World Bank Doing Business Report Paying taxes, ranking (out of 189 countries) 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 25.9 Denmark 12 10 130 20.3 3 2.8 26 Bulgaria 89 13 454 5 20.2 1.7 27 Switzerland 18 19 63 9.5 17.7 1.8 29 Slovenia 42 11 260 12.5 18.2 1.4 32 United Kingdom 16 8 110 20.9 11.3 1.5 33.7 Europe & Central Asia.. 20.5 234.3 10.4 21.4 3.1 34.9 Poland 87 18 286 13.1 24.7 1 38.7 Netherlands 23 9 123 21.1 17.6 0.4 39 Norway 15 4 83 24.8 15.9 0 40.7 OECD high income.. 11.8 175.4 16.4 23 1.9 41.3 Portugal 64 8 275 15.1 26.8 0.5 42.4 Romania 52 14 159 10.7 31.5 1 43.2 United States 47 10.6 175 28.2 9.7 6 43.8 Hungary 88 11 277 11.8 34.3 1.8 48 Czech Republic 119 8 413 7.6 38.4 2.6 48.5 Slovak Republic 100 20 207 8.5 39.7 0.4 48.6 Germany 68 9 218 23.3 21.2 4.3 48.8 Source: World Bank Doing Business 2015 Report
Economic activity concentrated in a small number of counties Only 5 counties produce more than 40% of GDP. Nominal GDP per capita (2011, % of country average) SM MM SV BT > 150% BH SJ CJ BN NT IS (125%, 150%] TM AR HD AB SB MS BV HR CV BC VN VS GL (100%, 125%] CS GJ VL AG DB BZ PH BR TL (75%, 100%] MH DJ OT TR IF B GR IL CL CT (50%, 75%] <= 50% Source: National Institute of Statistics, Raiffeisen RESEARCH.
Large companies are concentrated even more Over 50% of large companies are located in 5 counties. Number of companies with net turnover above EUR 5 mn. (2012) SM MM SV BT > 250 BH SJ CJ BN NT IS (200, 250] AR MS HR BC VS (150, 200] TM HD AB SB BV CV VN GL (100, 150] CS MH GJ DJ VL OT AG TR DB BZ PH BR TL IL IF B CL CT GR (50, 100] <= 50 Source: Ministry of Finance, Raiffeisen RESEARCH.