Macroeconomic and financial markets outlook Ionut Dumitru - PowerPoint PPT Presentation

ROMANIA Macroeconomic and financial markets outlook Ionut Dumitru Chief-economist, Raiffeisen Bank Romania February 2016

Economic growth momentum has strengthen as domestic demand accelerated Domestic demand (private consumption and investments) should further remain the major  driver of GDP growth following the recent boost provided by the cut of taxes and by the increase of wages in the public sector. Economic growth is shared by all major sectors of activity (industry, construction, services).  Real GDP and domestic demand Real GDP excluding agriculture (% yoy) 10 12 8 6.9% per year 6 9 4 6 2 2.8% per year 0 3 -2 -4 0 -6 -8 -3 2011 2012 2013 2014 2015F 2016F 2017F -6 Real GDP (% yoy) -9 Private consumption (% yoy) 01Q3 03Q3 05Q3 07Q3 09Q3 11Q3 13Q3 15Q3 Gross fixed capital formation (% yoy) Source: National Institute of Statistics, Eurostat, Raiffeisen RESEARCH

Strong rebound of households’ confidence and propensity to spend Fast growth of real disposable income has resulted in a rapid increase of consumer confidence.  Rapid increase of private consumption was the key driver of GDP growth in 2014 and in 2015. Private consumption should remain a major driver of GDP growth going forward as cuts of VAT  rate, increase of public wages, and hike of minimum wage would provide additional incentives for individuals to increase spending. Households' spending Employees' remuneration Consumer confidence indicator (11Q1=100) 10 (real terms, % yoy) 150 20 0 140 -10 15 130 -20 10 120 -30 5 -40 110 0 -50 100 -5 -60 90 -10 -70 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 -15 Unemployment expectations over next 12 months Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Nominal sales of durable consumer goods General economic situation over next 12 months Real retail sales Financial situation over next 12 months Savings over next 12 months Real private consumption Private sector Total economy Consumer confidence Note: Employees’ remuneration = (number of employees * net wage ) in private companies with at least four employees and in th e public sector Source: National Institute of Statistics, European Commission, GfK, Raiffeisen RESEARCH

Performance of exports has deteriorated, but the upward trend should continue Exports of goods towards some Emerging Markets (Russia, Ukraine, Moldova, Turkey, Brazil,  China) decreased in 2015 and this limited the advance of total exports. Strengthening of external demand and still low level of domestic labor cost should preserve the  upward trend of exports in 2016-2017. % of total RO Exports of goods, by partner countries exports Rank in 42 16 2014 Partner country 2013 2014 1 Germany 18.5 19.3 2 Italy 11.5 11.9 3 France 6.8 6.8 38 15 4 Hungary 5.0 5.1 5 Turkey 5.1 4.5 6 United Kingdom 4.1 4.1 7 Bulgaria 3.4 3.4 8 Russia 2.8 2.8 34 14 9 Spain 2.4 2.7 10 Netherlands 3.1 2.6 11 Poland 2.4 2.5 12 Austria 2.4 2.4 13 Czech Rep. 2.0 2.3 30 13 14 United States 1.7 1.9 Nov-12 Nov-13 Nov-14 Nov-15 15 Slovakia 1.7 1.8 16 Belgium 1.9 1.7 Exports to EU countries (EUR bn, last 12M) Total 74.7 75.5 Exports to non-EU countries (EUR bn, last 12M, RHS) EU 28 70 71 Non EU 28 30 29 Source: National Institute of Statistics, Eurostat, Raiffeisen RESEARCH

Good prospects for economy to keep growing in the next years The low level of GDP per capita suggests that the real convergence process should  remain in place from a medium and long term perspective. The main challenge for authorities would be to implement reforms aimed to speed up the real convergence process. Real GDP (% yoy) GDP per capita in PPS in 2015 10 (% of average for Germany and France) 120 8 6.5% per year 100 6 3.8% 80 4 2.7% 60 2 40 0 20 -2 0 -4 Turkey Romania Croatia Lithuania Estonia Portugal Cyprus Malta Belgium Denmark Austria Bulgaria Latvia Poland Hungary Greece Slovakia Slovenia Czech Republic Spain Italy France Finland United Kingdom Iceland Germany Sweden Netherlands Ireland -6 -8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016F 2017F Note: European Commission’s estimates as of February 2016 Source: European Commission, National Institute of Statistics, Raiffeisen RESEARCH

Fiscal consolidation trend was suddenly reversed Public budget deficit is foreseen to increase towards 3.0%  of GDP in 2016 and to remain close to this level in 2017. Public budget balance The reversal of the fiscal consolidation trend is the  0 consequence of both a reduction of taxes and an increase -1 of public spending: -2 VAT rate cuts in 2015, 2016 and 2017  -3 hike of public wages at the end of 2015  -4 increase of some social transfers starting with 2015  -5 reduction of tax on dividends in 2016  removal of tax on special constructions in 2017  -6 reduction of excises for fuels in 2017  -7 -8 The target of a structural public deficit amounting to 1.0%  -9 of GDP assumed by Romania as part of the Fiscal 2015F 2016F 2017F 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Compact (MTO) will be missed in 2016 as well as in the subsequent years. Consolidated budget balance (cash basis, % of GDP) Cyclically adjusted public budget balance (% of GDP) We expect also the current account deficit to increase in  the following years as the rapid advance of domestic Source: Ministry of Public Finances, European Commission, demand (boosted also by the fiscal stimulus) should result Raiffeisen RESEARCH in a faster increase of imports than of exports.

Negative inflation rate due to temporary favorable supply side shocks Cuts of VAT rate (June 2015, January 2016) should keep the annual inflation rate in the  negative territory until May 2016 and at a low level until December 2016. The annual inflation rate would jump to 2.5% yoy at the beginning of 2017 when the favorable statistical base effect fuelled by VAT rate cuts would fully fade out. We expect the NBR to keep the key rate unchanged at 1.75% in 2016 as its focus would be on  underlying inflationary pressures, on rapid economic growth and on risks related to fiscal policy. HICP excluding energy and Inflation outlook Key rate and money market unprocessed food at constant 8 rates indirect taxes (% yoy) 7% Forecast 5 6 6% 4 4 5% 4% 3 2 3% 2 0 2% 1 -2 1% 0% -4 0 Jul-13 Jul-14 Jul-15 Jan-13 Jan-14 Jan-15 Jan-16 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 -1 Dec-12 Dec-13 Dec-14 Dec-15 NBR mid-point target (%, yoy) Poland Hungary ROBOR 1M ROBOR 3M CPI (%, yoy) Euro Area Romania ROBOR 6M NBR key rate Source: National Institute of Statistics, Eurostat, Raiffeisen RESEARCH

Interest rates at historical lows to offer support for economic activity Lending interest rates in RON and FCY have reached historically low levels, which bodes  well for indebted companies and individuals, and for new lending activity. Lending in RON has improved substantially, offsetting for the decline in stock of FCY  denominated loans. As a result, annual dynamics of outstanding gross loans (RON+FCY) returned to the positive territory in Q4 2015. Dynamics of new loans in Dynamics of new loans in RON Outstanding gross loans to RON and EUR and EUR households and companies 60 60 20 19.8 40 15 40 10 20 20 5 2.8 0 0 0 -20 -20 -5 -10.2 -40 -10 -40 -15 -60 -60 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-09 Dec-11 Dec-13 Dec-15 Dec-09 Dec-11 Dec-13 Dec-15 Companies RON denominated (% yoy) RON denominated Housing FCY denominated (% yoy in EUR equiv.) Consumer, other purposes EUR denominated Total new loans in RON and EUR (% yoy) Total RON + FCY (% yoy, FX adjusted) Total new loans in RON and EUR (% yoy) Source: National Bank of Romania, Raiffeisen RESEARCH