Romania: Recent Macroeconomic & Banking System Developments April 2017 1 Inflation rate annual percentage change 8 6 4 Inflation target: 2.5% ±1 pp 2 0 CPI –excl. VAT CPI ‐2 adjusted CORE2 –excl. VAT adjusted CORE2 ‐4 Dec.11 Dec.12 Dec.13 Dec.14 Dec.15 Dec.16 Source: National Institute of Statistics, National Bank of Romania 2 Contributions to annual inflation rate contribution to annual inflation rate; percentage points 6 first‐round effects of VAT rate cuts tobacco and alcohol 4 volatile prices administrated prices adjusted CORE2 2 0 ‐2 ‐4 ‐6 Jul.13 Jul.14 Jul.15 Jul.16 Jan.13 Jan.14 Jan.15 Jan.16 Jan.17 Jun.13 Jun.14 Jun.15 Jun.16 Oct.13 Oct.14 Oct.15 Oct.16 Apr.13 Apr.14 Apr.15 Apr.16 Feb.13 Sep.13 Feb.14 Sep.14 Feb.15 Sep.15 Feb.16 Sep.16 Feb.17 Dec.13 Dec.14 Dec.15 Dec.16 Aug.13 Aug.14 Aug.15 Aug.16 Nov.13 Nov.14 Nov.15 Nov.16 Mar.13 Mar.14 Mar.15 Mar.16 May.13 May.14 May.15 May.16 Source: National Institute of Statistics, National Bank of Romania calculations 3 Producer prices Domestic PPI –Romania Non‐domestic PPI –EA19 and commodity prices %, yoy %, yoy %, yoy 10.0 12 75 industry industry* intermediate goods 7.5 10 60 energy commodity index (rhs) capital goods 5.0 consumer goods 8 45 2.5 6 30 0.0 4 15 ‐2.5 2 0 ‐5.0 0 ‐15 ‐7.5 ‐2 ‐30 ‐10.0 ‐4 ‐45 Jul.16 Jul.15 Jul.14 Jul.13 Jul.12 Jul.16 Jul.15 Jul.14 Jul.13 Jul.12 Jan.17 Jan.16 Jan.15 Jan.14 Jan.13 Jan.12 Feb.17 Jan.17 Oct.16 Jan.16 Oct.15 Jan.15 Oct.14 Jan.14 Oct.13 Jan.13 Oct.12 Jan.12 Apr.16 Apr.15 Apr.14 Apr.13 Apr.12 Oct.16 Oct.15 Oct.14 Oct.13 Oct.12 Feb.17 Apr.16 Apr.15 Apr.14 Apr.13 Apr.12 *) data not available for February 2017 Source: Eurostat, International Monetary Fund 4 Inflation forecast annual percentage change annual percentage change 12 12 uncertainty interval 10 10 annual CPI inflation rate (previous round) 8 8 annual CPI inflation rate (net of the VAT 6 6 first‐round effect) Inflation target: 2.5 ±1pp 4 annual CPI inflation rate 4 2 2 0 0 ‐2 ‐2 ‐4 ‐4 2014 2015 2016 2017 2018 Q4 Q4 Q4 Q4 Q4 Note: According to the February 2017 Inflation Report. The uncertainty interval was calculated based on the forecast errors in the NBR projections during 2005‐2016. The magnitude of forecast errors is positively correlated with the time horizon they refer to. Source: National Institute of Statistics, National Bank of Romania projections and calculations 5 Exogenous pressures on inflation Administered prices annual inflation end of period, % Dynamics of administered prices: 9 November 2016 IR The forecast for 2017 was revised February 2017 IR 6 downwards by 1.9 percentage points, 3 mainly amid scrapping a number of 0 non‐tax fees and charges starting ‐3 ‐6 February (primarily the subscription 2014 2015 2016 2017 2018 for national radio‐TV services) Q4 Q4 Q4 Q4 Q4 Volatile food prices annual inflation The trajectory of volatile food prices: end of period, % 9 Is based on the assumption of normal 6 agricultural years domestically 3 0 ‐3 November 2016 IR ‐6 February 2017 IR ‐9 2014 2015 2016 2017 2018 Q4 Q4 Q4 Q4 Q4 Source: NIS, NBR projections 6 Annual adjusted CORE2 inflation projection – determinants – Upward path, as a result of: Contributions to annual adjusted CORE2 inflation (pp) 5 The successive fading‐out of first‐round 4 statistical effects of the standard VAT rate 3 cuts 2 1 The gradual build‐up of inflationary 0 pressures stemming from fundamental ‐1 factors: ‐2 ‐3 . increase in excess demand, prompted by the ‐4 expansionary fiscal policy stance and the ‐5 higher disposable income ‐6 . the evolution of import prices for consumer 2014 2015 2016 2017 2018 goods, amid the advance in dynamics of Q4 Q4 Q4 Q4 Q4 VAT external prices import prices (consumer goods) . upward trajectory of inflation expectations* output gap inflation expectations driven by these factors annual adjusted CORE2 inflation rate, net of the VAT first‐round effect (%) annual adjusted CORE2 inflation rate (%) *) backward‐ and forward‐looking Note: The annual adjusted CORE2 inflation is calculated as a quarterly average, in line with its econometrically‐modelled determinants. Source: NBR calculations 7 Potential causes for inflation to deviate from the projected path Balance of risks to the Causes inflation path is assessed to be in equilibrium External coordinates: – volatility of capital flows to emerging economies, given the adjustment of the monetary policy stances of the world’s major central banks, the implications of the new US Tilted to the Administration’s economic policies on the world economic outlook, the Brexit, and the upside issues facing the European banking system –the prospects for economic growth and inflation in the euro area/EU and across major emerging economies Uncertainty about fiscal and income policies: –potential deviations from the set of fiscal measures included in the 2017 draft budget Tilted to the on either revenue or expenditure side upside –favouring fiscal or wage‐related measures aimed at boosting less sustainable domestic demand components to the detriment of those meant to increase capital expenditures Global commodity prices (food, energy) In equilibrium Administered price dynamics, conditional upon available information: Tilted to the – uncertainties surrounding the future adjustments in natural gas and electricity prices downside 8 Inflation expectations Economic agents* Financial analysts balance of answers (%), 3M moving average, s.a. 20 annual percentage change 6 trade inflation rate 1 year ahead 15 5 services inflation rate 2 years ahead 10 consumers 4 5 3 Inflation target 0 2 ‐5 1 ‐10 ‐15 0 ‐20 ‐1 Jul.16 Jul.15 Jul.16 Jul.15 Jan.17 Jan.16 Jan.15 Jan.17 Jan.16 Jan.15 Jun.16 Jun.15 Jun.16 Jun.15 Oct.16 Oct.15 Oct.16 Oct.15 Apr.16 Apr.15 Apr.16 Apr.15 Sep.16 Feb.17 Sep.15 Feb.16 Feb.15 Sep.16 Feb.17 Sep.15 Feb.16 Feb.15 Dec.16 Dec.15 Dec.16 Dec.15 Aug.16 Aug.15 Aug.16 Aug.15 Nov.16 Nov.15 Nov.16 Nov.15 Mar.17 Mar.16 Mar.15 Mar.17 Mar.16 Mar.15 May.16 May.15 May.16 May.15 *) 3‐month horizon for trade and services companies and 12‐month horizon for consumers; the annual inflation staying inside the ±5 percent variation band indicates price stability Source: EC‐DG ECFIN survey, National Bank of Romania survey among financial analysts 9 Source: f) annual European 2005 4.2 precentage National 2006 8.1 Commission 2007 6.9 Institute 8.5 2008 change, ‐ 2009 ‐7.1 Economic Real of gross ‐0.8 Statistics 2010 GDP 2011 1.1 data Forecast, 2012 0.6 Winter 2013 3.5 2014 3.1 2017 2015 3.9 2016 4.8 Economic 2017f 4.4 *) deviation 2007 Q1 2007 Q3 activity 2008 Q1 from 2008 Q3 2009 Q1 the 2009 Q3 historical 2010 Q1 Economic 2010 Q3 2011 Q1 average 2011 Q3 2012 Q1 confidence* (Apr. 2012 Q3 2013 Q1 2002 2013 Q3 ESI retail construction consumer services industry –Mar. 2014 Q1 2014 Q3 2017) 2015 Q1 2015 Q3 points, 2016 Q1 2016 Q3 s.a. 2017 Q1 10 12 6 0 ‐ ‐ ‐ ‐ 6 12 18 24 Contributions to growth Demand Supply contributions, percentage points percentage change contributions, percentage points percentage change 15 15 10 10 industry services 8 8 10 10 agriculture construction 6 net taxes on products 6 real GDP (rhs) 5 5 4 4 0 0 2 2 ‐5 ‐5 0 0 final consumption ‐2 ‐2 ‐10 gross fixed capital formation ‐10 net export ‐4 ‐4 change in inventories ‐15 real GDP (rhs) ‐15 ‐6 ‐6 ‐20 ‐20 ‐8 ‐8 2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: National Institute of Statistics, National Bank of Romania calculations 11 Domestic demand Private consumption Investment annual percentage change annual percentage change annual percentage change 30 40 20 household final consumption 25 durables (excl. auto) 30 15 non‐durables 20 auto 20 10 15 10 5 10 0 0 5 ‐10 ‐5 0 ‐20 ‐10 gross fixed capital formation (rhs) ‐5 ‐30 civil engineering works ‐15 buildings equipment ‐10 ‐40 ‐20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 2016 Source: National Institute of Statistics, National Bank of Romania calculations 12 Industrial output annual percentage change annual percentage change 12 15 10 10 8 5 6 10.3 9.3 4 7.5 7.8 0 5.5 6.1 5.8 2 2.7 2.4 2.7 1.7 ‐5 0 ‐2 ‐10 ‐5.5 total industry ‐4 mining and quarrying ‐15 ‐6 manufacturing electricity, gas, steam and air conditioning supply ‐8 ‐20 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Jan.2017 Jan.2017 Source: National Institute of Statistics 13 Recent developments in industry Industrial production Employees in industry contributions to the annual rate, pp annual rate, % 25 4 4 ↓ 2016 ↑ 2016 ↑ Jan.2017 ↑ Jan.2017 auto industry 20 electrical 3 3 equipment 15 2 2 10 manufacturing metallurgy energy production and supply 5 1 1 pharma food industry chemicals 0 machinery and 0 0 equipment furniture ‐5 light industry coke products mining rubber ‐1 ‐1 ‐10 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 construction ↓ 2016 materials ↑ 2016 2015 2015 2015 2015 2016 2016 2016 2016 ‐15 Jan.2017 ↓ Jan.2017 ↓ Jan.2017 mining ‐20 energy production and supply ‐20 ‐15 ‐10 ‐5 0 5 10152025 other manufacturing sub‐sectors Ox: average annual growth rate in 2016, % auto and related industries (rubber, electrical equipment) Oy: average annual growth rate in Jan.2017, % industry (rhs) Source: National Institute of Statistics, National Bank of Romania calculations 14 Labour market conditions Number of employees Labour market tightness annual change, thou.