5 pc economic decrease, national currency depreciation by up to 20 per cent, need of liquidity, poor quality and low level of investment are just a few of the consequences of the intensification of the financial crisis in the euro zone, estimated by the Fund analysts in the next period.
Romania has made significant progress in macroeconomic stabilisation during the two stand-by agreements, but economic recovery remains fragile, says the 2012 IMF Board Report of the sixth review of the stand-by agreement, published yesterday. In addition, Romania is vulnerable to an intensification of the crisis in the euro zone. The continuation of domestic political tensions could cause adverse reactions in asset prices. The Romanian economy growth potential will remain below 2 per cent until 2014 and will gradually grow to 3.1 per cent by 2017. This slow recovery suggests the fact that the current crisis has left lasting scars in the economy, IMF analysts say. In addition, the powerful intensification of the crisis in the euro zone, with an average probability of materialisation, would have a major impact on Romania, an economic decrease of 5 per cent and a depreciation of the national currency by 15-20 per cent being possible. The crisis has left ‘deep scars’ in the Romanian economy and the potential GDP growth is going to need time to recover. Fund experts anticipate a potential growth by less than 2 per cent until 2014 and a fast acceleration to 3.1 per cent in 2017. Growth rates of 5-6 per cent, like those prior to the crisis, will be difficult to achieve in the absence of major reforms that would bring more people into the labour market and attract investment. The IMF has revised its forecast for the potential GDP growth from 2 per cent to 1.4 per cent this year and from 2.9 per cent to 1.8 per cent next year. In 2014, the potential growth will be 2.2 per cent, in 2015 – 2.7 per cent, in 2016 – 2.9 per cent and in 2017 3.1 per cent.
Not least, the accessing of EU funds below expectation, a highly likely situation, would affect growth projections which are tightly connected to stepping up the usage of European money. ‘Romania has strong commercial and financial relations with the euro zone members. Exports to Germany, Italy and France form about 40 per cent of the total export and the banking system is greatly under the control of banks from the euro zone. Foreign currency loans stand for approximately 60 per cent of the credit given to the private sector’, the report further notes. Should the euro crisis suffer a serious deterioration, Romania may need urgent liquidity and it may have to turn to the programme with the IMF. The report also shows that state-owned companies still have an important role in the Romanian economy, there being approximately 1,000 such enterprises employing 20,000 – 30,000 workers.
Companies responsible for almost all existing arrears
State-owned companies are relatively inefficient, have low profitability, but pay higher average salaries compared to the private sector. In addition, state-owned companies are responsible for almost all existing arrears, also being a place for public funds drainage paid as subsidies. The poor quality and low level of investment compared to what would be needed in the sectors dominated by state-owned enterprises, such as transport and energy, are determinant in the perception of the quality of infrastructure in such sectors. That undermines the idea that Romania is the right place to do business, the report further notes.
Smallest health expenditure in UE
As far as healthcare is concerned, the Romanian system is facing a number of challenges waiting to be dealt with. Reforms in this area could become a unique opportunity to tackle such challenges by correcting current financial imbalances that do exist in spite of the low expenditure level, fighting inefficiency that could free up additional financial resources and contribute to slowing down the rise of expenditure in the future, improving medical care services and setting up a sustainable financing scheme. The IMF analysts stress that the total healthcare expenditure in Romania – 5.6 per cent of GDP in 2010 – is the lowest in the European Union. The EU average is approximately 9 per cent. By comparison, Bulgaria, a country with a lower GDP per capita, has a level of health expenditure higher by 1.4 per cent.
Vulnerability also in the banking sector
The Romanian banking sector remains vulnerable to the consequences of the euro crisis. Eighty per cent of the Romanian banking sector is property of foreign banks, with Austrian ones predominating (38 per cent of assets). Hellenic banks’ subsidiaries hold approximately 14 per cent f the assets and 12 per cent of deposits. While the general bank capitalisation is still good – 14.7 per cent – , the situation of liquidity has become more heterogeneous among the different banks, and financing costs are growing. The growth of lending has slowed down and bad loans have continued to grow to 16.8 per cent in June, primarily because of the poor economic activity and vulnerability posed by foreign currency loans. The impact of an acceleration of financial disintermediation of major foreign banks in Romania would be high, crediting would collapse, dragging along investment and consumption, and bad loans would know a steep rise. If financial markets stopped lending money to Romania, a situation of low probability, the impact would be average, because the fiscal and forex reserves cover most of the debt that will mature on a short term. A certain fiscal consolidation and financing through the IMF programme would be necessary.