COMMENT: Is the level of Romania’s foreign debt a cause for concern?

COMMENT: Is the level of Romania’s foreign debt a cause for concern?
National Bank of Romania in Bucharest.
By Alexandru M. Tanase in London June 2, 2016

Romania’s foreign debt levels have not received much attention in recent years, with the authorities and, more importantly, foreign investors more focused on the country’s decade of achievements since it joined the EU rather being concerned about the current level of external indebtedness of the country. That, in my opinion, could be a mistake.

When it comes to foreign debt, Romania started its transition to a market economy from a favourable position. Romania was the only country in the former communist bloc that began its transition with zero foreign debt. Unfortunately, this large advantage was to disappear quite fast and much sooner than anticipated, as the table below shows.

By the end of 1996, the level of Romanian foreign debt had reached almost $7bn. The rate of the increase was amazing, but this was not the most problematic issue: the final destination of the borrowed money was the key issue. Romanian indebted itself for consumption, not for investment. This worrying trend has continued almost to date, although efforts have been made to address the situation. The most striking period was actually 1990-1992, when more than 60% of Romania’s imports were consumption goods. Also, during those years Romania, like many other countries in transition, borrowed more from international financial institutions (around 50% of its foreign debt in those years).

Still, in those days the key ratio of debt/GDP remained at very favourable levels, though international reserves were very low by widely accepted standards or by International Monetary Fund (IMF) recommendations. The Romanian authorities intended to keep the level of debt/GDP at around 22-23% and to change the structure of its borrowing towards the private sector (see the Program of the Romanian Government for 1997-2000). A great emphasis was meant to be put on increasing exports and attracting foreign direct investment. The declared purpose was to have a balanced external financing position, keep foreign debt under control, have a level of reserves at above the minimum threshold of three months of imports, and prepare for full convertibility of the Romanian leu. All these were the indeed the right strategic directions; the reality, though, was quite different. 

20 years on

Two decades on and the picture has significantly changed. As of the end of March, according to data published by the National Bank of Romania (NBR), the foreign debt of Romania stood at €89.0bn. This is a modest decrease from the dizzy heights of €99.7bn reached at the end of 2012. The efforts of the Romanian authorities to reduce its foreign debt should be noted, but the key question remains: is Romania still too indebted?

From the available data, it is quite clear that Romania is not a heavily indebted country (HIC). In accordance with the data published recently by the IMF (“Central, Eastern and Southeastern Europe – How to get Back on the Fast Track”, May 2016), the debt/GDP ratio seems to be still at a reasonable level, especially when compared with other countries from the region.

The level of 59.2% of total external debt/GDP seems to be sustainable for the time being. However, there are quite a few worrisome trends that the Romanian authorities need to closely monitor:

  • The ability to increase Romanian exports will be limited due to market competition, while demand for imports will continue to increase due to changes in the consumption habits of the Romanian population. The practice of very large current account deficits should be avoided as a matter of priority;

  • The production capacity of the Romanian national economy is still in need of high investments and Romanian infrastructure (highway, railways, etc.) is still undeveloped compared to Western European standards;

  • Romania’s agriculture (which has one of the highest potentials in Europe) is in need of fundamental restructuring, financial support (including from the EU) and a young(er) work force;

  • The Romanian service sector, including tourism, is still developing and material investments are required to exploit it to its full potential. Large potential tourist attractions/themes/zones are not being used to their ful potential exploited, eg. Danube Delta, Black Sea resorts, Dracula Castle, Bucovina monasteries, Maramures – to name just a few;

  • The workforce in Romania is on a clear decreasing trend (from 8.1mn average number of employees in 1990 to 4.5mn in 2014) due to, amongst other factors, heavy emigration and an ageing population;

  • The level of remittances that Romania received from abroad (estimated to have contributed to more than 0.5% of GDP in the past years) is falling as Romanians working abroad start to lose their connections with home;

  • So far, the reduction in Romania’s foreign debt from its peak of €99.1bn to the current level of €89.0bn was done in parallel with a slight reduction of international reserves from a level of €33.2bn as of end-2011 to the current level of €31.5bn (end-April 2016, without gold);

  • The privatisation pace, which was quite remarkable during the previous decade, is slowing down, as the key material assets of the economy have already been sold or transferred to the more vibrant private sector;

  • The price of gold is fluctuating and the current high level is not guaranteed to last forever (apart from the international currency reserves, Romania holds 103.7 tonnes of pure gold, which at the prevailing price as of end-April 2016 was valued at €3.7bn).


Close to the brim

So, assuming that Romania will continue its disciplined implementation of the programmes agreed with the IMF and other international financial institutions, the answer to the question from the title is: No, not yet.

However, while Romania is clearly not an HIC, it’s external equilibrium is still quite fragile and could easily find itself under pressure. Any turbulence on the global markets and/or sharp fluctuations in exchange rates, further distress in the Eurozone or unfavourable geopolitical developments in the region could easily disturb this fragile equilibrium. Moreover, Romania made a public goal of its intention to join the Eurozone (this was a moving target, but the latest deadline was discussed and is now anticipated to be by 2020). Therefore, active management of external debt and international reserves is clearly required because, to put it in other words, the current level of Romanian foreign debt, despite its modest recent decline, is almost full to the brim.

Alexandru M. Tanase, PhD, is an Independent Consultant and Former Associate Director, Senior Banker at the European Bank for Reconstruction & Development. These are personal views of the author. The assessments and views expressed are not those of the EBRD and/or of any other institution quoted. The assessment and data are based on information as of end-May 2016.