Analysts: Foreign deficit must be lowered to 10% of GDP

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The current account deficit is now at levels difficult to be sustained on long term and must be corrected, and foreign investments, which up to now have been viewed as a healthy financing source, might apply pressure soon on the deepening of the unbalanced foreign deficit, under conditions in which multinationals start to repatriate profits made locally, say analysts present to the sixth Conference of Young Economists, organized by Romania’s National Bank.
 
According to Ionut Dumitru, director of research department of Raiffeisen Bank, the current account deficit should be corrected and brought down to 10% of the Gross Domestic Product, compared to the level of some 14% of the GDP currently, and which is increasingly difficult to be sustained.
„The question is if the deficits are still sustainable under conditions in which we assist to unprecedented turmoil on the international markets, marked by a liquidity crisis and more expensive financing”, underlined Dumitru.
 
In his opinion, a 10% deficit of the GDP is structural and needed within the real convergence process to the euro zone. The difference up to the current level of 14% is generated by big imports of vehicles and agri-food products.
„We have an excessive deficit starting with 2004. The fundamental factors are linked to the real convergence. We cannot adjust it below 10%. We have a rigid situation. We can push it down to 10% relatively easy, but to drop it below this level means we must give up convergence. A deficit of 8-10% of the GDP might not create problems and it would allow us to develop”, added director of research department of Raiffeisen Bank.
 
He maintained that the deficit can be adjusted in the zone of transport means, when Ford Co. will start the car production. „We hope to see a reduction of the deficit, when Ford will start production.
Still the risks for the commercial balance remain and we could expect a deterioration because our main partner, the euro zone, does not feel too well. We expect to see a slowdown in exports to the euro zone”, Dumitru also said.
 
In his turn, Valentin Lazea, BNR Chief economist, underlined that Romania must have a current account deficit of 10% of the GDP in order to reduce the gap separating it from the European countries. In his opinion, the difference between the deficit of 14% of the GDP estimated for this year and the one aimed at, of 10% of the GDP, has the excessive consumption as a determining factor. „Policies must be focused on a deficit reduction from 14% to 10%.
But we cannot expect that this reduction will be achieved in one year alone”, Lazea also said.
 
National currency depreciation in the first half of the year played an important role to stabilize the deficit, favouring a good evolution of the commercial balance and, as the director of research department of Raiffeisen Bank noted, significant structural modifications were brought to the economy, Romania increasingly exporting more big added value products.
Romania could be affected by a slight deterioration of its commercial balance and a slowdown of exports, under conditions in which there are fears that the euro zone, the main commercial partner, will enter recession, the newspaper reads.
 
In connection with the adjustment of the current account deficit, Nicolaie Chidesciuc, ING senior economist, said that a more depreciated exchange rate would be needed compared to the current level, of 3.6 lei/euro.
Given that, at present, the exchange rate balanced level is close to the level on the market, Nicolaie Chidesciuc appreciated that a drastic depreciation is less likely.
As well, he said that, even though the real appreciation trend exists, it is likely that, in the future, some „exchange rate depreciation episodes” will appear.
According to some analysts, the lowering of the current account deficit from some 12% to 10% of the GDP would suppose an exchange rate of some 3.8 lei/euro on a period of some 1-2 years.
 
Referring to foreign investments, the analysts present at the conference remarked the lately growth which has fed equipment and technology imports, with a growing weight in the total imports.
Even though the production capacities created will subsequently feed exports, foreign investors will apply pressure on the current account deficit at the moment when they will start to massively repatriate the achieved profits.
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