Romania highly exposed to global downturn as coronavirus spreads

Newsroom 12/03/2020 | 14:05

Romania entered 2020 in a bad shape from an economic perspective, with huge twin deficits, high financing needs, crippled infrastructure, a workforce crisis, and political turmoil. A possible global downturn – whether triggered by the new coronavirus outbreak or by something else – could add a lot of pain to this already tough state of affairs.

By Sorin Melenciuc

 

Large twin deficits

First of all, Romania’s fiscal position has considerably weakened, with its budget deficit peaking at 4.6 percent of the gross domestic product (GDP) in 2019, the highest level since 2010 and by far the largest in the European Union. At the same time, Romania closed 2019 with a current account deficit of EUR 10.5 billion, or 4.7 percent of GDP – again, the highest in the EU -, compared to 4.4 percent in 2018 and 2.8 percent in 2017. Foreign direct investment (FDI), traditionally seen as a “sound” way to finance the current account deficit, flattened at around EUR 5.3 billion last year, covering only half of the gap.

This fiscal runaway train was triggered mainly by the populist wage increase-oriented policies of the past few years, which allocated almost all the budgetary resources of the eastern European nation towards wage and pension spending and cut investments in almost all areas. Having run out of resources, the government now has limited choices. Experts warn that currency depreciation may prove to be a prime option in this context.

“As the Romanian LEU is strengthening in real terms, it becomes an additional pain point for exporters. We believe that currency depreciation should be considered though, at least in line with the inflation differential between Romania and its main trading partners,” ING Bank analyst Valentin Tataru wrote in a recent report.

 

Political turmoil and pension disaster

In addition to the lack of options, the government faces some major political dangers that could lead the nation towards bankruptcy. A currently applicable law has scheduled a 40 percent pension increase starting from September 1, 2020, a burden already seen by most analysts as catastrophic for public finances. However, no Romania politician dares to propose a postponement of the measure in a year with two rounds of elections – local and parliamentary. But experts abroad have already calculated the impact of the pension hikes.

“If implemented as is without offsetting policy measures, the new law could double Romania’s already sizable fiscal deficit, substantially increase current account deficits and raise external financing needs to excessive levels,” IMF says in its 2019 Article IV Consultation staff report.

However, it is not yet clear whether the budgetary disaster triggered by the pension hike can be avoided. The current liberal government and president Klaus Iohannis have tried to force early parliamentary elections this summer – ahead of the scheduled pensions increase. But their plan now seems to have failed because the other parties, which still control a majority of the seats in the Parliament, have blocked the procedures, with the help of the Constitutional Court (also controlled by the former ruling parties).

Fiscal Council projections show that, if implemented, the pension law coupled with other current policies (no-policy change scenario) would increase Romania’s public debt to 51 percent of GDP in 2023 and to 91 percent of GDP in 2030. “Romania’s public debt is projected to be on an explosive trajectory, but the markets will force corrections,” the council warned in a recent study.

A global slowdown was already in sight for 2020 even before the coronavirus outbreak in China, but the new international health emergency may end up having a much larger impact on the economy than initially estimated. Romania has been bracing for the almost inevitable arrival of the virus as several European countries have reported cases. Experts are prudent and say it is too early to estimate the economic impact of the coronavirus, but business sentiment already seems to be affected.

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