Romania - OECD Economic Outlook June 2020

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Romania GDP is projected to decrease by 8.6% in 2020, should a second virus outbreak take place by the end of 2020, while it would fall by 6.5% should a second wave of the pandemic be avoided. These negative shocks will have a long-lasting impact on the economy in both scenarios, with GDP remaining below its pre-crisis level at the end of 2021. The recovery will be slower in case of a second outbreak due to a more pronounced deterioration of the labour market and steeper losses in productive capacity.

Expanding policy measures to sustain the economy and prevent a surge in poverty is urgent. The social safety net needs strengthening. Investment in infrastructure and efforts to reduce the administrative burden on businesses are key to accelerate the recovery and reap the benefits of a potential relocation of production to Romania. In case of a second virus outbreak, introducing a short-time work scheme and delaying the payment of social contributions would help to preserve employment. Air pollution has been an aggravating factor of the pandemic and taking measures to reduce it is urgent.

Containment measures have reduced risks The first COVID-19 case in Romania was recorded on 26 February. The pandemic then spread rapidly, with around one-third of all cases located in Bucharest and Suceava. Shortages of medical staff, protective material, and adequate procedures slowed the containment of the pandemic. Large public investment in medical equipment has been implemented in response to the sanitary crisis, but is deemed insufficient to limit infection risks in care units.

Romania GDP has collapsed

Labour market conditions will deteriorate

Real GDP

Unemployment rate

Index 2019Q4 = 100, s.a.

110 105

Single-hit scenario

Single-hit scenario

Double-hit scenario

Double-hit scenario

% of labour force 19 17 15

100

13 11

95

9

90

7 85 80

5 2019

2020

2021

0

0

2019

2020

2021

3

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934139860

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

292 _

Romania: Demand, output and prices (double-hit scenario) 2016

Romania: double-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2017

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

Current prices RON billion

765.1 478.2 115.4 175.0 768.7 3.5 772.2 315.1 322.2 - 7.1

7.1 10.0 4.2 3.6 7.6 0.8 8.4 7.6 10.8 -1.4

4.4 7.3 2.1 -1.2 4.7 1.0 5.7 6.2 9.1 -1.4

4.1 5.9 6.4 18.2 8.5 -3.0 5.6 4.6 8.0 -1.7

-8.6 -8.2 3.6 -18.5 -8.6 -0.5 -9.0 -13.2 -13.9 0.8

1.8 1.8 2.0 -0.5 1.4 0.0 1.4 3.8 2.7 0.3

_ _ _ _ _ _ _ _

4.7 1.3 1.5 4.9 -2.6 45.1 35.1 -2.8

6.3 4.6 2.8 4.2 -2.9 43.6 34.7 -4.4

6.9 3.8 3.2 3.9 -4.3 44.2 35.2 -4.6

3.5 1.9 2.5 10.2 -9.1 55.8 46.8 -3.5

1.2 0.9 0.9 9.1 -8.8 62.0 53.0 -3.4

Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138587

Strict containment measures were adopted after mid-March, including travel restrictions from and to high-risk countries, the closure of all educational institutions and non-essential shops. A nation-wide lockdown started on 25 March with a duration of around 8 weeks. The biggest COVID-19 hotspots were placed under complete quarantine. Since 15 May, confinement measures have been progressively eased, with public gatherings and inter-city travel restricted during the first reopening phase.

Economic activity has been hit hard The COVID-19 pandemic has entailed a notable contraction of the economy mainly due to lockdown measures and high reliance on trade and investment from Western European countries. Indicators point to a significant and widespread decline in turnover and confidence. The automotive and tourism sectors almost fully stopped operating during the lockdown, while demand for transport, personal, accommodation and food services, which account for a relatively large share of total value added, has collapsed. About 15% of job contracts have been suspended and 4% terminated during the confinement. Financial market sentiment has worsened and 10-year government bond yields have increased, signalling rising risk levels and lower investor confidence.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

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Romania: Demand, output and prices (single-hit scenario) 2016

Romania: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Stockbuilding1 Total domestic demand Exports of goods and services Imports of goods and services Net exports1

2017

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

Current prices RON billion

765.1 478.2 115.4 175.0 768.7 3.5 772.2 315.1 322.2 - 7.1

7.1 10.0 4.2 3.6 7.6 0.8 8.4 7.6 10.8 -1.4

4.4 7.3 2.1 -1.2 4.7 1.0 5.7 6.2 9.1 -1.4

4.1 5.9 6.4 18.2 8.5 -3.0 5.6 4.6 8.0 -1.7

-6.5 -5.9 3.5 -14.8 -6.4 -0.5 -6.8 -10.9 -11.4 0.6

4.7 4.4 1.4 7.2 4.5 0.0 4.5 8.0 7.1 0.1

_ _ _ _ _ _ _ _

4.7 1.3 1.5 4.9 -2.6 45.1 35.1 -2.8

6.3 4.6 2.8 4.2 -2.9 43.6 34.7 -4.4

6.9 3.8 3.2 3.9 -4.3 44.2 35.2 -4.6

3.5 1.9 2.6 9.0 -8.0 54.2 45.2 -3.7

1.7 1.5 1.4 6.7 -6.6 57.3 48.4 -3.9

Memorandum items GDP deflator Consumer price index Core consumer price index2 Unemployment rate (% of labour force) General government financial balance (% of GDP) General government gross debt (% of GDP) General government debt, Maastricht definition (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column.

2. Consumer price index excluding food and energy.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/888934138606

Support measures are not reaching the most vulnerable Monetary policy has limited the risk of a sizable tightening in financial conditions and sustained credit supply. The National Bank of Romania reduced the policy rate by 0.5 percentage point at the end of March and by 0.25 percentage point on 2 June, to 1.75%, committed to provide liquidity to financial institutions, and announced the purchase of government bonds on the secondary market. A temporary moratorium on debt repayments has been introduced for firms and individuals affected by the pandemic together with a relaxation of macro-prudential regulation for credit institutions. A fiscal package amounting to around 1.2% of GDP, partly financed with EU funds, includes wage subsidies for employees on temporary lay-off and increased spending on medical equipment. Other support measures comprise state loan guarantees with subsidised interest rates for SMEs, tax deferrals, and the extension of payment deadlines for utility services and rents. The expected impact of the measures on the economy is relatively low, as most end shortly after the lockdown. They will not reach the most vulnerable people, especially those detached from the labour market or operating in the informal sector. The government has announced a new fiscal package starting from June, but details on the measures were not available at the time of writing.

The economic outlook is highly uncertain The COVID-19 pandemic will take a heavy toll on the economy. If a second virus wave takes place in the autumn (the double-hit scenario), GDP is projected to decrease by 8.6% in 2020 and to recover only slowly in 2021. Pressure on firms already weakened by the first shock will increase. Job destruction, decreasing wages, and reduced remittances will curtail household purchasing power. Weaker domestic demand will OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

294 _ lead to cash-flow problems, threatening the survival of credit-constrained firms. While the deterioration of the international environment and disruptions to supply chains will weigh on exports, the current account balance will improve on the back of a sharp fall in imported goods. The fiscal deficit will deteriorate significantly, reaching around 9% of GDP in 2020 and pushing public debt above 50% of GDP in 2021. In the absence of a second outbreak (the single-hit scenario), GDP growth will fall by 6.5%, recovering only partially from the adverse economic impact of lockdown measures in 2021. Despite relatively weak automatic stabilisers and low fiscal stimulus, public debt is projected to reach around 48% of GDP in 2021.

Downside risks include the loss of foreign investors’ confidence, resulting in a strong deterioration of financial conditions. By contrast, the pandemic could encourage the shortening of supply chains and a relocation of activity from Asia to Eastern Europe, potentially stimulating foreign direct investment and job creation.

Policy action could limit long-lasting damages to the economy To mitigate the resurgence of poverty, access to social benefits should be extended and cash transfers be considered for low-income families. In case of a second virus outbreak, delaying the payment of social security contributions and establishing a short-time work scheme could support viable firms temporarily affected by the pandemic and preserve employment. A free and reactive credit mediation scheme to help companies – particularly SMEs – experiencing difficulties in accessing loans and dealing with cash-flow problems should be set up. Improving infrastructure, especially in transportation where needs are large, will be key to speed up the recovery, stimulate business investment, and meet environmental challenges.

Reducing air pollution is urgent as it increases health risks. Freeing up the necessary fiscal space will require revising public spending priorities and postponing the pension reform, which – if implemented - would add more than 2 percentage points of GDP to the already high fiscal deficit and rising public debt in 2021.

OECD ECONOMIC OUTLOOK VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020