COMMENT: Romania must get its house in order or fall behind

By bne IntelliNews March 23, 2007

Bogdan Preda in Bucharest -

Last year, Moody's Investors Service lifted Romania's sovereign rating to investment grade 'Baa3', foreign direct investment (FDI) financed almost 100% of the country's current-account deficit and the government was predicting this investment would continue arriving in large amounts. Yet these days FDI is covering no more than half the current-account gap, which in January was almost triple what it was in the same month of 2006. A bit worrying?

Over the last few weeks, Moody's, the IMF and even Romania's finance minister have all claimed it is becoming worrying. With no data released yet for Romania's current-account deficit through the end of February, arguably the figures could have improved. But the stubborn evidence of endless political turmoil, wider-than-ever trade and current-account gaps, and a lack of any major state-owned assets to sell all point toward one thing: Romania must get its house in order or fall behind.

Romania's trade deficit in January grew to €812m from €375m a year ago and most economists reckon it will continue widening on the back of a rise in consumption and commercial lending, a stronger currency, higher wages, and lower duties including taxes since the country joined the EU on January 1.

At this time last year, FDI was already totalling €1bn, which financed 98% of the current-account gap through the end of February. By the end of January this year, FDI covered a mere 51% of the deficit, which had almost tripled from the same month of 2006.

None like this left to sell

For the whole of 2006, Romania attracted a record €9.1bn of FDI as the government sold off large assets such as the country's biggest lender Banca Comerciala Romana, which went to Erste Bank for €3.75bn. But just three months after accession to the EU, the government doesn't have many more large assets to sell to beef up the portion of FDI financing its balance of payments.

So, what can it do to finance its gap at a time when its labour productivity is still low and exports are far from challenging imports?

The answer is it has no choice but to hope that more foreign companies will start new businesses and spend more money on its territory. But is Romania becoming more attractive? The IMF, Moody's and Finance Minister Sebastian Vladescu don’t think so. Are they being contradicted by anyone else? Unfortunately, they aren't.

In fact, just days after the IMF, Moody's and the Vladescu all warned in separate statements that political turmoil could hurt Romania, President Traian Basescu again urged Prime Minister Calin Popescu-Tariceanu's government to submit to a confidence vote in parliament and accept early elections. Tariceanu has repeatedly rejected such plans.

Portuguese Syndrome

On March 7, the IMF's representatives in Romania warned that the country could see its FDI fall to no more than a maximum of €7bn this year – far from enough to finance its current-account gap, which it predicts will widen to 12% of GDP this year from 10.3% in 2006. The economy will probably grow by 7% this year compared with 7.7% in 2006.

Moody's followed two weeks later by warning that Romania is among the countries whose current-account deficits at more than 10% of GDP, together with having only limited control over inflation, makes them more vulnerable to adverse economic shocks.

Moody's said Romania and Bulgaria, the EU's newest members, together with the Baltic states of Estonia, Latvia and Lithuania are in danger of sliding toward what it called the "Portuguese syndrome'' – economic stagnation caused by a slow adjustment of its balance of payments, which is burdened by rising commercial lending.

Moody's analyst Kenneth Orchard explicitly stated the agency is worried that political tensions in Romania could delay economic reforms, which would have effects over the longer term. Even so, Moody's said it wasn't planning to change Romania's ratings anytime soon, which Vladescu said, "could be seen both as good and bad news.''

A member of PM Tariceanu's co-ruling National Liberal Party, Vladescu warned that Romania will have a hard time tempting back investors once they get frightened for "reasons of political unrest'', such as that currently involving Tariceanu and Basescu.

"I hope we'll have enough intelligence to avoid such a situation, because if we don't, the window of opportunity will close beyond our control, and it will no longer matter what we tell investors after they get scared,'' Vladescu said in comments cited by business daily Ziarul Financiar. "No one outside will pay attention to politicians' calming statements, no matter how intelligent they'll sound.''

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