Growth more recently accelerated on the back of fiscal stimulus, and Romania’s real GDP growth surged to 6.9 percent in 2017, but inflationary pressures have increased since mid-2017 on account of sharp wage increases and strong domestic demand. With signs of overheating, there is a risk that the current policy trajectory increases macroeconomic volatility, and wears down buffers, adversely affecting market confidence, the IMF said.
Romania’s financial sector remains dominated by banks, a large share of which is foreign-owned, but the importance of NBFLs (non-banking financial lenders) is growing. The banking system as a whole holds around 80 percent of financial sector assets. Concentration is moderate, with the largest five banks accounting for about 60% of total deposits (and 57% of all loans) in the system. Loans granted by NBFLs, a majority of which are owned by banks, accounted for just over 10% of total loans, but the share is increasing.
Key vulnerabilities facing the Romanian financial system include banks’ exposure to the government through large positions in domestic sovereign debt (about 22% of assets as of December 2017) and guarantees for First Home state-guaranteed mortgage-loans. The banking system is also becoming increasingly exposed to real estate. Housing loans increased from 21% of loans to households to more than 54% between 2008 and 2017.
The IMF recommends authorities apply a stressed debt-service-to-income limit to household loans and continue scaling back the First Home program.
Non-performing loans (NPLs) reached 21.9% of total loans in 2013, but have been brought down to 6.4% in December 2017. Following the balance sheet clean-up that started in 2014, through write-offs and sales of NPLs to debt collection agencies, banking sector profitability rebounded to positive territory in 2015 and further improved into 2017, the report noted.
Exposures of banks and NBFLs to an increase in NPLs, both on domestic and foreign currency loans, with corporates leverage still high, and growing lending by NBFLs leading to vulnerabilities and reputational risks for the banking sector.
At roughly 36.8% of GDP at year-end 2017, the stock of Romania’s public debt is relatively low compared to other EU countries. However, for an emerging market economy it is approaching levels that may give rise to concern, the IMF said.