Romania: Two 100s and still counting

Romania: Two 100s and still counting
The National Military Parade in Bucharest in December 2018, marking the 100th anniversary of the modern and unified Romania.
By Alexandru M. Tanase in London February 25, 2019

Very proud Romanians celebrated the 100th anniversary of the modern and unified Romania on December 1, 2018. Many happy returns! A century of a tumultuous history for which the current generation should be grateful to those millions of soldiers who made the supreme sacrifice for their country during WWI. Still in December 2018, but this time on the last day of the centenary year, Romania reached a foreign debt of almost €100bn, or €98.5bn to be more precise. The two 100s could not be more different in their emotional and economic connotations. The first one was the symbol of a great achievement, while the second one is a sign of increasing concerns regarding the macro-economic stability of the country. The 100 year historic celebration came and went, but the €98.5bn foreign debt will have lasting consequences. The latter will be a formidable challenge for a few generations to come and the prediction of its eventual outcome is almost impossible.  

In a comment published by bne IntelliNews in September 2018 (A concerning increase of Romania’s foreign debt), I expressed clear concerns regarding the increasing trend of the Romanian foreign debt (in parallel with a sizeable and also increasing domestic debt). If anything happened since then, the trend continued unabated. According to the figures published on February 13 this year by the National Bank of Romania (NBR), the level of total gross foreign debt of the country reached €98.5bn, which is very close to the maximum reached in April 2013 of €102.7bn. In absolute terms, this is a sizeable increase, but Romania’s foreign debt is still treated by the current Romanian authorities as a benign issue. During the last three years alone total foreign debt increased from €92.9bn as of end-2016 to €98.5bn as of end-2018. 

This is, inter alia, a direct result of very populist measures taken by the recent social-democratic governments to increase the salaries in the public sector and to grant higher and/or special pensions to larger and larger segments of the Romanian society and to increase the subsidies for political parties. The cost of special pensions granted to parliamentarians, magistrates and other categories is estimated at €1bn per year. The emigration of the young Romanian workforce (some 5mn have left Romania after December 1989, and more so during the last 10 years) gave a heavy blow to the country’s industrial, agricultural and, more generally, to its economic potential. The state budget is yet to be finally approved in February 2019 and most likely will end up with high deficits due to expansionary expenses and poor revenue collection. The late approval of the budget shows lack of financial discipline and disregard for the law, which clearly stipulates the need to approve the budget well before the start of the year. All these may prove unsustainable in the short- and medium-term, without an economic growth based on production and services and not on consumption alone, which was the case so far. The graph below is a very expressive illustration of the worrisome trends of the foreign debt, on one side, and of the international reserves, including gold, on the other side.

The gap between foreign debt and international reserves has increased. The level of the international reserves decreased in absolute terms from €34.2bn as of end-2016 to €30.7bn as of January 31, 2019 and the service of the foreign debt will require payments of €14bn this year (according to the NBR).

Source: NBR Interactive Data Base - February 2018

Also, the monthly coverage of imports and services with international reserves decreased from 5.4 months as of end-2017 to 4.9 months as of end-2018. Under such circumstances, it is very likely that the government will have to borrow externally and/or internally in order to sustain such large repayments, but its relations with the Romanian key banks are currently at a low point as new taxes were introduced (see the controversial case of the tax on assets depending (OU 114/2018) on the level of Robor used by the commercial banks) in an attempt to collect more money to cover the large budgetary deficits. 

Also, as previously signalled, the structure of the Romanian foreign debt by maturities had suffered major changes during the last 5 years. For instance the share of long term debt decreased from 80.41% as of end-2013 to 68.25% as of end-2018, while the share of the short term liabilities increased accordingly during the same period from 19.59% to 31.75% as of end-2018. This could be risky as the service of the short term debt tends to be more difficult to anticipate, service and control. Moreover, the news that Romania might consider selling a part of its gold (103.3 tonnes as of January 2019), even if not true, had very negative connotations, especially in the context of yet another country (Venezuela which held 132 tonnes before starting to sell) selling large parts of its gold holdings to be able to provide basic foods for its people. The trust required by the international markets that the government promotes a fair taxation policy and will not dent the much needed independence of the National Bank has been shaken, possibly with serious and lasting consequences.

Starting with January 1, 2019, Romanian has the Presidency of the Council of the European Union for six months up to June 30, 2019, at a historical time when Brexit is likely to happen (if it is not delayed). Also, starting with 2018, a set of measures to adhere to the Euro zone were announced by the Romanian authorities, but unfortunately this process is not driven by the experienced staff of the NBR, as it should have been done. However, this is a programme for the longer term (the aim is to become a member by 2024) and until then the fate of national currency, the Romanian leu, should be properly handled. The last few months of ups and downs of the leu’s exchange rate showed that its evolutions cannot be the results of monetary measures only. The fiscal sector of the country should be put in order first and foremost. All in all, the actions and/or results so far are not very encouraging. There is an evident lack of experienced governmental staff to handle properly such an important and honourable task.

It is fair to mention that as compared with other countries in transition, Romania is not a heavily indebted country. There are various estimations of the ratio of its foreign debt to GDP, with many such ratios being computed to just under 50%. I concur with such an estimation by the National Commission for Prognosis based on a figure of RON945bn for 2018 GDP. Ukraine, Moldova, Hungary, Bulgaria, Serbia, the Czech Republic and others have much higher ratios. Nevertheless, the set of immediate measures to be taken by the Romanian authorities mentioned in the quoted article (increase exports, develop tourism, attract more foreign direct investment, full absorption of the EU funds, re-develop the industrial and agri-business potential of the country, introduce more favourable treatment of the inflow of remittances, abolish or heavily tax the special pensions, etc.) should be treated as being needed now. All of those proposed measures are still valid, but the focus of the Romanian authorities seems to be more on justice and the presidential elections next year than anything else. This is not the right direction and therefore millions of Romanians seem to be disillusioned with the Romanian authorities. Avoiding unsustainable populist measures and control of foreign debt should be national priorities to ensure that Romanians will continue to build upon the first 100th anniversary of the country.

Alexandru M. Tanase is an independent consultant and former associate director, senior banker at the EBRD and former IMF advisor. These are personal views of the author. The assessments and views expressed are not those of the NBR and/or of any other institution quoted. The assessment and data are based on information as of mid-February 2019.