In an article published last year about savings in Romania during the pandemic, we underlined that despite all odds, the savings held by Romanians, both in Romanian lei and foreign currencies, had actually increased. While the present position is no different as compared with the situation one year ago, the saving and lending process would benefit from a closer look. The key scope of a brief analysis would be to uncover the key drivers which led to a surprisingly good macro-economic development in the extremely challenging circumstances of the pandemic of the last two years.
Romania — Loans and deposits during the pandemic, 2020-2021
Source: Own computations based on the BNR’s data and National Institute of Statistics (NIS)
*= estimation for 2021 by the National Commission for Strategy and Prognosis; Ex. Rate = eop:.
Under such circumstances, the figures presented in the table above for 2021 seem to be surprising to a certain extent. The total volume of savings made by the population and other non-governmental entities increased by a respectable amount of RON59.6bn (€12.0bn). This number is just a little bit higher than the increase in absolute terms if compared to that of 2020. Such an achievement is to be applauded if the troubles of 2021 are taken into account. In a way, the increase of savings in 2020 was a “forced increase”, as the level of restrictions were high. Shopping centres were closed until June 15, 2020, a fact which reduced consumers’ chances to spend. Also, during 2020, the travel industry was restricted both domestically and internationally. “Stay at home” restrictions were in place. However, the key driver of the large increase of 2020 savings could have been the so-called “unknown factor”. In those 2020 days, nobody knew for sure if the pandemic was a temporary situation or not. Let us remember the “great panic” of April 2020 (at the start of the pandemic) when depositors asked for their money back from the commercial banks, behaving irrationally. At that time, the price of the Romanian governmental bonds jumped temporally on the secondary market from 3.5% to almost 6%.
Fortunately, good sense prevailed in the end. Vaccination started and the Romanians, like all others, started to learn to live with this terrible virus, whose origins are not known even today. However, more recently we found out that this is going to be with us for years and therefore the attitude of the population changed accordingly. Thus, the pace of savings remained constant in 2021 similar to 2020. It is very likely that this trend will continue for the foreseeable future. One interesting feature is that sight deposits denominated in foreign currencies were higher in 2020 than the same type of deposits denominated in lei, a trend prompted precisely by the pandemic. During 2021, this was reversed as the population’s fears of the “unknown” started to calm down.
On the other hand, total borrowings started to pick up in 2021 (+14%) after an almost flat year in 2020, with loans denominated in foreign currency growing much slower than those in lei in both years. This is also a good signal that the economy started to recover after the disastrous 2020. The support given to Romania by the European Union (EU) through the National Plan of Recovery and Resilience (NPRR) had a positive impact as well on both savings and total loans. Currently Romania has allocations of €29.2bn under this plan and the acid test for the country would be to manage to absorb these funds, both the free non-reimbursable (grants) of €14.2bn and the loans of €14.9bn as well. In this respect it is too early to assess if a successful utilisation will be achieved or not. The first part of the money arrived in the country and the first tranche of €1,851mn was placed in reserves with the National Bank of Romania (BNR).
Interest rates, which play a key role in both the saving and lending processes, represent a fine balancing act of the BNR. This has been done properly by the central bank with the last adjustment being made in January 2022. The base rate was increased to 2.00% starting with January 11. However, if the estimated level of inflation of 7.90% for 2021 is taken into account, more fine tuning is required, especially if the savings are to be stimulated further. The commercial banks should also act, as the interest granted for a one year-term deposit, for instance, of around 2.0% for lei and 0.01% for euro is obviously much less than the inflation. In addition, the quality of services granted by the commercial banks to the population should be increased. Basically, saving money during the last two years was not favourable for depositors who actually lost money in real terms.
Under these circumstances, Romania was inevitably forced to borrow further from international markets, despite good reserves. According to the figures provided by the BNR, the level of the international reserves reached €45.8bn, of which the 103.6 tonnes of gold held by the country counted for €5.4bn. This seems to be the good part of the story and could be connected with the level of savings registered by the country. While the level of international reserves is comfortable at this stage, one could raise the issue of the costs of holding such reserves. There is no dispute about the role of the gold, but it should be mentioned that it produces no income. On the contrary, holding gold is a costly exercise. Also, keeping large amounts in reserves with foreign banks will not bring good rewards as the rates paid on deposits are currently very low. There is no adequate guidance on how much gold and international reserves should kept at an optimal and cost-effective level. This is even more needed in the context of another well commended action undertaken in August 2021 by the International Monetary Fund (IMF) to issue Special Drawing Rights (SDR) for a total amount of SDR650bn. Out of this total amount, Romania had an allocation of SDR1,736mn, which was the equivalent of €2,100mn.
However, on the other side, Romania’s foreign debt increased dramatically during these last two years. It reached €133.2bn as of December 31, 2021 which is the highest level in the history of the country. The new SDR allocation mentioned above is now part of the country’s foreign debt. There is no clear strategy on how the external debt will be paid. Moreover, during 2021 a current account deficit of €15.3bn was registered (€9.8bn in 2020), which is yet another historical level. Apart from large trade deficits, the level of remittances fluctuated in the last two years and it is likely that this feature will continue, with specific variations by sending countries due to pandemic status in each particular case.
It is true that many other countries fought the pandemic via external borrowings, but in Romania’s case this practice is more risky as the absolute level of this indicator is more than 55% of its GDP. An immediate strategy is required and the BNR should be the main responsible institution to lead this exercise whose final scope should be to control the increase of the foreign currency debt. As part of this strategy, Romania should be selective in its borrowings from abroad. There were many analyses published during 2021/early 2022 which clearly pointed out that Romania is paying a hefty price in borrowing in foreign currencies without a clear strategy. According to the European Central Bank, Romania’s average cost of borrowing (for long term governmental bonds in national currency) is higher than that of Poland, Hungary, Czech Republic and Bulgaria, to name just a few. Romania cannot afford this anymore.
The year 2022 brought to Europe and specifically to the Romanians a very complex regional geo-political context. Also, the pandemic crisis is not yet over. Both factors will show that use of domestic savings will become very handy as and when the relaunch of the Romanian economy will be in full swing.
Alexandru M. Tănase, PhD, is an independent author and former associate director, senior banker at the EBRD and former IMF Advisor. Mihai Radoi is a director of a specialised Investment Fund focused on Eastern Europe and former Executive Director of Anglo-Romanian Bank, London and previously of the BFR Bank, Paris. These are personal views of the authors and are not of any quoted institution (including, but not limited to, those of the IMF, EBRD and NBR). The assessment and data are based on available information as of end-January 2022.