“In the first 9 months of the current year, the gross domestic product (GDP) fell 7.4 percent in real terms from the same period of the year before. Economy is expected to dip around 7.0 percent in 2009, and a moderate recovery by slightly more than 1.0 percent is anticipated for 2010. The external imbalance is no longer a source of risk.
The simultaneous shrinkage of domestic and external demand on the background of heightened prudence, the slowdown in the growth pace of available revenues and the maintaining of restrictive credit standards resulted in a severe correction of external imbalances from the previous unsustainable values. The current account deficit anticipated for the end of the year is 4.6 percent of the GDP, by about 7.2 percent below that registered in 2008 (11.8 percent of the GDP, according to revised data provided by the National Bank of Romania).
This new deficit becomes sustainable, being financed in the first ten months of this year, to an extent of 94 percent, from foreign direct investments of non-residents that totaled 3,720 million euros,” reads the program. The budget deficit has become a risk factor.
The consolidated budget deficit over the first ten months of this year was 5.1 percent of GDP, also as a result of the reduction in budget revenues as an effect of the intensification of the economic crisis. The situation in 2009, when the projected external deficit of 4.6 percent of the GDP corresponds to an external surplus in the private sector of about 2.7 percent of GDP, is neither normal nor sustainable.
The private sector is expected to face deficit again, as the economic growth resumes. For Romania’s current account deficit to keep within sustainable limits, starting next year, the budget deficit needs to narrow below the 7.3 percent of the GDP estimated for this year. The stock market underwent major corrections in the first months of 2009 and the volatility of the national currency’s exchange rate was higher until the agreement with the international financial institutions was signed.
The conclusion in the first part of 2009 of a multilateral external financial arrangement with the International Monetary Fund, the European Union, the World Bank and other international financial institutions occurred against the backdrop of highly volatile financial markets, characterized by an increased risk of investments being abandoned and foreign investors withdrawing their capital, especially from emerging economies;
the effect of the international financial crisis combined with a series of macroeconomic imbalances specific to Romanian economy, such as the high GDP share of the current account deficit (12.3 percent in 2008) and the financing thereof in a progressive proportion by the build-up of external short-term debt, mainly from private sources, which fueled the unsustainable growth rates of the non-governmental credit and heightened the risk of debt roll-over becoming impossible as the debt crisis was amplifying and international liquidity was draining out.
The fiscal and revenue policies have a pro-cyclical character: the budget deficit widened from about 1 percent of the GDP in 2005 to 4.9 percent of the GDP in 2008, and the revenue policy has fueled the substantial growth of wages in the public sector to levels above private sector pays. With both public sector wages and employee numbers rising, the GDP share of the public sector’s payroll outlays increased from about 6 percent in 2004 to 9 percent at the end of 2008 (which means that the growth rate of these outlays outpaced the GDP), thereby generating an additional deficit of over 3 percent of the GDP.
Slippages occurred also in the pensions policy, where the actual correlation of the evolution of pensions in the public system with the annual national average wage caused a structural budget deficit (in the long term) of nearly 2 percent of the GDP, this without taking into account the negative projection of the evolution of demographic indicators.
From the standpoint of the Romanian authorities, as stated in the Governing Program, the rationale of the agreement with the international financial institutions has been and remains limiting the impact of the international crisis on the Romanian economy, which is anyway more severe than initially anticipated. Thus, adjustments were avoided that could have been hard to bear for the population and companies;
the prospects for the evolution of Romanian economy, the sustainability and consistence of public policies were improved by the pledge to implement, within a given timeframe, reforms in areas agreed upon with the international financial institutions; a relatively low-cost access to funding was provided in order to offset the potential major reduction in capital flows to the Romanian economy.
“The conclusion of the agreement with the international financial institutions had a series of immediate positive effects, specifically: it made available external financing resources by both progressively attracting borrowed resources and by the ‘Bank coordination initiative for Romania’, whereby the parent banks of the main credit institutions with foreign capital present in Romania pledged to maintain their exposure to Romania and increase the capital of these institutions, in order to weather any adverse effects of the economic crisis.
In the first half of this year, the external debt rollover degree was about 82 percent above the projections of the program initially agreed upon with the international financial institutions; there was a mitigation of the volatility of the national currency’s exchange rate, along with the diminution of the risks related to foreign financing; the risk premium charged by foreign investors on Romania was also cut back,” reads the cited document.