Romania: Current account gap widens further in May

Despite signs of a slowdown in consumption, the trade balance on items such as food remains stubbornly negative suggesting that competitiveness issues prevail. Overall, the trade gap widened by 14.9% year on year in May, as export growth in the auto sector is levelling off while the food deficit has failed to correct.

At €0.7 billion, the total external position still remains in positive territory. Foreign direct investments (FDI’s) picked up a bit in May but are still covering only 56% of the C/A shortfall.

So far, there are no convincing signs of a correction in the external imbalance. We see the C/A reaching -3.7% of GDP in 2018, versus -3.4% in 2017. Despite these weaker fundamentals, the Romanian leu (RON) is somewhat protected by higher carry. Also, the central bank is unlikely to allow meaningful RON depreciation due to a high exchange rate pass-through in inflation.