Romania's CA deficit shows signs of moderation for first time in three years

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Romania's current account (CA) deficit contracted by 8% y/y to just over EUR 5 bln (1.75% of GDP) in Q1, the National Bank of Romania announced.

The country's 12-month CA gap eased to EUR 26.3 bln at the end of March (9.2% of GDP), slightly down from EUR 26.7 bln three months earlier, marking the first decline since mid-2020 when the deficit was smaller than EUR 10 bln and accounted for a moderate 4.5% of GDP.

The improvement was partly due to thinner energy imports (lower prices and volumes), but it could be assumed that more moderate private consumption has also contributed.

Combined with a significant rise in Romania's nominal GDP, the smaller external deficit resulted in a major drop of the CA gap-to-GDP ratio to 1.55% in Q1 this year, based on the projected GDP, down from 2.25% in the same period last year.

The external deficit was seasonally small in the first quarter of the year, but this sends a positive message for the government's expectation of bringing the CA gap down to 8.1% of GDP this year and 6.7% of GDP until 2026.

In Q1 this year, the moderation in the CA gap was driven by stronger net export of services (+26% y/y to EUR 2.84 bln) amid a marginal decline of the massive deficit in the trade with goods (-2% y/y to EUR 6.57 bln).

The net outflows generated by the stock of direct and portfolio investments (+5% y/y to EUR 3.84 bln) are a significant element of Romania's CA balance. Most of it is balanced by the re-investment of the profits generated by the FDI companies, but this generates vulnerabilities.

In the first quarter of the year, the reinvested earnings dropped by 7% y/y to EUR 2.34 bln. Over the 12 months to March, the reinvested earnings accounted for half of the profits and interest generated by foreign investors in Romania - which is historically a high rate of replacement.

iulian@romania-insider.com

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