Conflicting developments in Romanian economy

The most recent signals coming from the Romanian economy outline a contradictory image. In spite of the continuing economic growth trend, the national currency, the leu, has reached the lowest level against the euro it has ever seen. At the same time, the National Bank of Romania announced that by the end of the year the inflation rate is going to exceed the initial forecasts. Under these circumstances, what are the prospects of securing some stability for the economy of Romania? We tried to get some answers from specialists.

Constantin Rudnitchi, a journalist and a macro-economy analyst, gave us more details about the characteristics of the economic growth Romania is currently seeing, in a debate hosted by the public radio station just days ago:

Constantin Rudnitchi: “If we look at how the Gross Domestic Product is formed, that is at which sectors generate the largest shares of the GDP, what we notice first is the industry. And this comes against the perceived notion that Romania no longer has an industry. Romania does have an industrial sector, which actually contributes one-quarter of the added value in Romania’s overall production. Secondly, the services sector is expanding, and within this sector the IT segment plays a key part. I would also add here the very good figures reported by road carriers, particularly those who provide services internationally and bring foreign currency into the country. They also have notable performances, and make a substantial contribution to the country’s economic growth. And if we were to go into more detail, we would see that it is first and foremost the exporters that generate this industrial growth, and also the ones who benefit from it. This category includes a range of quite diverse industries. There is the automotive industry, first of all, but also foreign, multinational companies that are part of this value chain in the sense that they make products in Romania and then export them. And one other thing worth noting is that over the past 2 or 3 years the economic growth has been supported by salary increases and tax cuts. This has led to an increase in demand, and implicitly an increase in consumption.”

Higher consumption also prompted an increase in imports, which made the developments in the Romanian economy more dependent on developments in the European market. In the Eurozone, in the past year, the inflation rate tripled, from 0.5% in October 2016 to 1.5% last month. Concurrently, crude prices also tripled, and the price of imported foodstuffs also went up, triggered by the unfavourable weather for Western Europe’s agriculture. 

Constantin Rudnitchi: “The inflation estimate made public by the National Bank a week ago is 2.7% for this year. And I would like to make a quick comment here. We find ourselves in a very interesting situation. In the 1990s inflation was a three-figure number, standing at 110% or 120%. We felt it differently at the time. Now we are in the situation of switching from an inflation rate that seems small, of only 1%, 0.5% or even smaller, to an inflation rate of 1.7%, but we are not used to such increases. In statistical terms their level is small, but in reality we perceive them as high. I believe that the main problem is that Romanian economy continues to reports a high consumption rate for imported goods, which means a continuous pressure on imports and also on the trade deficit, which is high enough as it is. In terms of the budget deficit, the biggest problems emerge mainly from the state’s expenditure and revenues. I expect the deficit to remain at 3%. The economic growth did not bring much more money to the budget but in my opinion, but speaking of the budget deficit, the main problem is that Romania has not managed to attract European funds this year. So there is a complete lack of European funds that could have improved a little bit both the current account balance, namely the money that come into the country, and the budget deficit.”

At the same time, the domestic currency has seriously depreciated lately, reaching a record low level against the euro. Andrei Radulescu, chief economist with Transilvania Bank, one of the important operators on the Romanian financial market, explains:

Andrei Radulescu: “We see for instance that at the last monetary policy meeting for this year, last held last week, the Central Bank cautioned that three key instruments, namely the bank reserves, interest rates and the exchange rate cannot be all controlled at the same time. Talking about the real economy, we see that in the last few quarters we have been witnessing a deterioration of balances in the domestic economy, either in terms of internal balance, the situation of public finances or in terms of the economy’s external position and current account deficit. In this context, a depreciation of the domestic currency helps us offset the deterioration of Romania’s foreign position, in the sense that in theory the higher exchange rate makes imports more expensive, and this should automatically influence the future evolution of the current account deficit.”

The next period will show more clearly just how much these developments will affect the stability of the Romanian economy. The European Commission’s forecast in this respect is worrisome, making Romania’s goal of joining the Eurozone require more thorough consideration by all stakeholders. 

(translated by: Ana-Maria Popescu, Elena Enache)