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16 I Companies & Markets bne July 2019
COMMENT: Romania reaches new historic levels of foreign debt
Alexandru M. Tanase in London
Since February 25 when my last comment on Romania’s foreign debt was published by bne IntelliNews, many dramatic changes have happened on the country’s political scene. The president of Romania’s largest party who was also the president of the Chamber of Deputies was sent to prison. The race for the presidency of the Social Democratic Party (PSD) is wide open. On May 26, the Romanian electorate gave a stark warning to the leftist parties of the country
during the elections of the 32 Romanian members of the new European Parliament. Support for the PSD was clearly on a declining trend, with especially the vote outside the country (by the Romanian diaspora) being cast in favour of new political forces. Meanwhile, nobody paid any attention to a much more concerning trend, namely that of the fast increase of the Romanian foreign debt. More seriously, perhaps,
some Romanian political and academic circles took the view that Romania’s foreign indebtedness could be much higher. Nothing could be more wrong or dangerous!
In two comments published by bne IntelliNews in September 2018 and February 2019, respectively (A concerning increase of Romania’s foreign debt and Romania: Two 100s and still counting), I expressed clear concerns regarding the increasing trend of the Romanian foreign debt (in parallel with domestic debt). If anything, since then, as mentioned above, the trend has continued unabated and at a faster pace. According to the figures published on June 13 by the National Bank of Romania (NBR), the total gross foreign debt of the country reached €103.1bn, which was above the level reached in April 2013
of €102.7bn, considered so far an absolute peak. In absolute terms, this is a sizeable increase of €3.7bn as compared to end-2018. However, despite all of this, Romania’s foreign debt is still treated by the current Romanian political authorities as a benign issue. During the last three years alone, total foreign debt increased from €92.9bn as of end-2016 to €98.5bn as of end-2018 before reaching €103.1bn as of end-April 2019. Such a fast increase will have lasting and/or dramatic consequences and it will be a clear burden on generations to come. In addition, the emigration of the young Romanian workforce (some 5mn have left Romania) gave also a heavy blow to the country’s industrial, agricultural and, more generally, to its economic potential.
This worrisome increase was a direct result of very populist measures taken by the PSD governments (supported by its coalition partner ALDE) to increase salaries in the public sector (their average is currently higher than that of the private sector), to grant higher and/or special pensions to larger and larger segments of the Romanian society and to
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increase the subsidies for political parties for various elections past (May 2019) and future (November 2019). The cost of special pensions granted to parliamentarians, magistrates and other categories is estimated at €1bn per year and even more concerning is that this is envisaged to be extended to a wider range of beneficiaries at local levels (mayors, etc.). Their elimination and/or higher taxation is imperative. The state budget was finally approved very late in March 2019 after a lot of political wrangling and many large cities of Romania (starting with its capital Bucharest) have serious financial difficulties (“undeclared bankruptcies” according to some
key mayors). The poor revenue collection was also a result of appointing very inexperienced managers at National Agency of Fiscal Administration (ANAF), the state revenue collection agency. The dismissal of such inexperienced management was finally done in June 2019, but precious time was lost in revenue collection for this year.
Romanian society should understand that living on debt (in this case, on foreign debt) is only a palliative solution. This is what Romania was doing over the last three decades since the events of December 1989. Sooner or later somebody should pick up the bill and repay the debt. The graph below is a very expressive illustration of the worrisome trends of the foreign debt, on one side, and of the international reserves, including gold, on the other side. The gap between foreign debt and international reserves has increased. The level of the international reserves alone decreased in absolute terms from €34.2bn as of end- 2016 to €33.7bn as of end-April 2019. Moreover, the service of the foreign debt required payments of €22bn during the first four months of this year, according to the NBR. Two more key indicators: the foreign debt service ratio and the coverage of imports with international reserves also worsened to 16.6% (from 21.2% in 2018) and to 4.8 months (4.9 months as of end-2018), respectively. The coverage of short term debt with
Romania. EUR 103.1 – New historical level of foreign debt.