The fast surge in short-term foreign debt may become a serious problem in the event of a reversal of the RON appreciation trend, analysts believe.
Over the past two years, foreign debt, and particularly the short-term foreign debt, have been growing fast as private companies have resorted to financing from abroad increasingly more often. Last November, short-term foreign debt topped 13.2 billion euros, double the level reached in late 2005. Its weight in the overall foreign debt climbed to almost 33% last autumn, from 20% in December 2005 and only 7% in 2000. At the level of Central and Eastern European countries, the ratio was a little above 22% in September.
"The fast rise in short-term foreign debt generated a strong increase in the foreign debt service. Though the overall foreign debt, as a percentage of GDP, is still below the average of CEE countries, covering it and the debt servicing through exports and reserves is becoming more difficult," says Ionut Dumitru, head of research with Raiffeisen Bank. Romania's foreign debt has been following a steady upward trend over the past eight years, climbing from 12 billion euros in 1998, to over 40 billion euros last November. As part of it, short-term debt has registered a strong dynamics in the past two years, doubling year-on-year, both in 2005 and 2006. Thus, foreign debt has come to account for almost 122% in goods and services exports last November, while the CEE average stands at only 104.5%.
"Foreign debt is vulnerable to a current account deficit that further deepens. Given an expected deterioration of deficit financing through foreign direct investments over the next years (once the major privatisations have been finalised), I believe there will be rising pressures on the exchange rate," considers Dumitru. He expects foreign investors to be increasingly more cautious given the high level of the current account deficit, which will in time translate into RON depreciation pressures. Under such circumstances, a high foreign debt service might prove difficult to handle.
In Dumitru's opinion, the accelerated growth of short-term foreign debt was also fuelled by local banks' loan export to foreign shareholders. In parallel, domestic banks are often resorting to lines of financing from parent companies, generally contracted on short periods.
Against NBR's international reserves (foreign currency plus gold), the short-time foreign debt service has come to account for 67%, from 45% in 2005 and 8% in 2004. In the case of overall foreign debt service, the ratio is visibly worse: it accounted for 98.4% of the international reserves in September, more than double against 2004.
NBR officials last autumn showed international reserves, which climbed to 22.9 billion euros, needed to expand further to the very end of swiftly covering foreign debt.
Foreign debt
Has witnessed a fast growth pace over the past two years as private companies have often resorted to foreign financing
Short-term foreign debt exceeded 13.2bn euros last November, double the level reached at the end of 2005
Has followed a constant upward trend over the last 8 years, climbing from 12bn euros in 1998, to over 40bn euros last November
Has come to account for almost 122% in goods and services exports last November
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