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August 5, 2021

Forecasts vs. prospects

There’s some interesting reading in the Romanian press, especially in the economic written media, at a time when even the government seems to ignore reality, while the population doesn’t know whom it should blame for the worsening situation.

Faced with austerity measures enforced on July 1st, plus the VAT hike to 24 pc, the average Romanian fell prey to existential worries related to survival. But the major topics approached by newspapers rather refer to the problems of bankers and businessmen. Certainly, they are the economic drivers, as the private environment is essential to both micro and macro economy. Yet, many people “in the know” actually plead and promote their interests, rather than seeing things at a global scale. On many occasions, we seem to witness a clairvoyants’ contest: how much will the economy grow or fall, how much will inflation increase? Everybody makes predictions.

In the wake of the VAT hike, the IMF rose the inflation target for 2010 to 7.9 pc. The Central Bank sees it at 8 pc. Then bankers and experts come and say the most plausible scenario will have it at 5-6 pc; pessimists take the effects of present floods upon crops in certain regions and forecast an 8 pc price increase for agricultural products. Finally, when added to the inflation forecast, the variable has negative consequences.

Romania’s economic growth this year is another reason for concern. We know neither the calculation basis, nor the model used by various entities in the market, whose predictions differ by wide margins. We won’t give examples, but most “fortune tellers” have negative visions. This is no surprise, given the limited abilities proven by the acting cabinet. Anyway, optimists speak about a plus/minus 0.5 pc evolution of the GDP, moderates see it at minus 1.5 pc, while pessimists warn of a decline by 3 pc and the economic downturn continuing in 2011 as well. And there are many pessimists. Wednesday, former premier Radu Vasile said in an interview broadcast live on the internet that he sees 2011 as another year of decline, with no recovery from crisis in the near future.

Businessmen too have economic visions of their own, which – unfortunately – could often be labelled as “wishful thinking.” Some would like to see the flat tax brought down to 10 pc, or less, even in the present economic conditions, possibly accompanied by lower welfare contributions. This is the only way to economic recovery, they say. It is obvious, but the government has no money, following its own excesses and those of its predecessors. True, the great ideas come when times are hard, but not by enforcing “to the letter” what is learned in economic universities. Theory is necessary, but Romanians have trouble when it comes to practice. Also based on theory, another businessman advises the Central Bank to drop the key interest rate at 1-2 pc. Yes, this would be a real revolution. But the capital of Romania is Bucharest, not Washington DC, not even Brussels…

A well-known banker is – legitimately – concerned with the prospects of the banking sector, so we learn that Romanian banks are now focusing on savings, rather than crediting. There is no demand for credits in Lei or hard currency, so the crediting market has frozen. It has nothing to do with too high interest rates, or too harsh lending conditions, we are told. This may be true, but it is too similar to the joke about people not eating stale bread because they are not hungry, rather than because it’s stale. So, we understand an entrepreneur can only be happy when he can take loans in RON at interests of 16-18 pc, even higher.

Finally, the banks that operate in the Romanian market are making an effort. They are trying hard to cover, from own sources, the tax on interests in effect since the 1st of July. Many might wonder why they are doing this. The answer is relatively simple, though no banker will give it. These months, many Romanians took their money out of banks, because of lack of confidence and efficiency. So, this is an effort to keep clients, rather than to please clients.

The prospects are murky. It was President Traian Basescu himself who said it, in an interview. In order to restore salaries to their normal level on January 1st 2011, 25 pc of civil servants must go. Furthermore, all incomes must become subject to taxation, including pensions. This brings us to square one. What we don’t know is what government wants the president to use in order to enact such harsh reforms.

This is a matter of even more ambiguous speculation, where the forecasts made by the aforementioned newspaper experts look even more like the small talk of talk-shows on TV. As far as we can remember, none of those who are making predictions now warned about the imminence of financial crisis in Romania two years ago, when the storm had already started elsewhere in the world. Nor did any of them forecast the GDP decrease by almost 8 pc. On the contrary, optimism was general at that time, though there was nothing to support it, as later evolutions have demonstrated. What are the prospects now?

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