A significant adjustment of the current account of 4% of GDP, done in an orderly fashion, is strictly necessary to "sweeten" the manner in which foreign investors will decide to cut foreign funding in Romania, believes Lucian Croitoru, NBR Governor's advisor.
The reduction of the foreign deficit by this percentage of the GDP could generate more credibility for the policies in Romania, as it would lead to a lesser decline of the foreign funding, to less pressure on the RON to depreciate and to an about 5% economic growth. Croitoru feels this would be "the strong scenario" that would give investors the impression that Romania's economic policies are consistent.
With the international financial crisis ongoing, the appetite of foreign investors and the resources they are willing to invest in Romania are dwindling, and the foreign vulnerability is high, because of the high level of current account deficit. Under the circumstances, it is necessary to strengthen the fiscal policy and adjust the foreign imbalance.
Croitoru says that in a pessimist scenario of a deficit decrease of only 2.5% of GDP, i.e. an only 1.5% adjustment of the budget deficit and a 1% adjustment on the part of the private sector will not be enough to convey a message of confidence to investors, so that Romania's position abroad will deteriorate. Under such circumstances, a significant loss of foreign funding will be seen, the economic growth will stand at 3% and the RON depreciation at 4.3 RON/EUR, so that an import of credibility might become necessary, that is an agreement with international financial institutions, Croitoru says.
Toni Iordache, head of capital markets Deloitte Balkans, in turn believes that if the exchange rate exceeds 4 RON/EUR, the cost of loans in foreign currency may go up by 25-45%.
In a 4% of GDP adjustment scenario, considering the 3.5% of GDP budget deficit estimated for 2008, Croitoru sees as necessary a 2.5% of GDP reduction for next year to 1% of GDP, which should be the public sector's contribution to the adjustment of the current account deficit. The remaining up to 4% should come from the private sector. Out of the total current account deficit, 14% of GDP, 11% are the deficit of the private sector financed by foreign resources.
"If the adjustment of the foreign deficit is insufficient, it will be accompanied by a significant loss of the foreign reserve. The foreign financing will be lower and the liabilities of the banks will be lower, too. The insufficient adjustment of the current account deficit for the public sector will probably make the market take care of the adjustment, which can be much harsher," explained Croitoru, who is a former representative of Romania to the IMF. Under such circumstances, he believes there may be dramatic consequences and an agreement with the IMF or ECB might become necessary.
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