“Relative to GDP, the share of the budget deficit decreased slightly at the end of last year, and the share of the current account deficit decreased to a certain extent during the first months of this year. However, these corrections are insufficient, and the levels of the two deficits continue to single us out, in a negative way, by reference to neighboring countries with which we are compared by investors. There is also the risk that some of these corrections will be canceled out by the developments in the second part of the current year, so that markets and investors may conclude that they were only temporary and that there is no sustainable process of reducing the twin deficits, backed up by appropriate and effective policies,” said Badea.
According to Badea, such a situation must be avoided for at least three objective reasons. The first is that the macroeconomic balance would become difficult to maintain, and the risks of a crisis arising from internal causes would increase significantly, with an impact on the standard of living of the population and the potential for future development. The second reason, which objectively follows from the first, is that we become even more vulnerable to possible exogenous economic shocks, the probability of which is increasing in the current European economic and geopolitical context (the main destination of our exports). In other words, internal risks add to the external ones (and they are higher now), so the probability of a shock (regardless of the source) that pushes us into an economic crisis is greater. The third reason (but not the last) why further reduction of the twin deficits is necessary results from the fact that their current high level is the expression of a structurally deficient dynamics of the Romanian economy (both in the public sector and in the private sector), which over time erodes the potential for future development (the debt burden increases, fewer resources remain for investments, competitiveness is lost, etc.).
Many emerging countries, including Romania, have developed an economic model in which the goods produced for export incorporate a significant proportion of imported goods needed in the production process. If we add the domestic consumption which is predominantly based on imported goods, we have already been for some time in the presence of macroeconomic imbalances that tend to become chronic. In the case of Romania, the data (presented below) show that the stimulation of consumption to achieve economic growth in conditions of a deficit in the balance of trade also had negative side effects on macroeconomic equilibria.
The main macroeconomic imbalances Romania is facing, especially the budget deficit and the current account deficit, have been analyzed, discussed, and written about for many years. The causes, their dynamics, and the visible and potential effects have been widely debated and considered from multiple angles. Possible solutions have been proposed, both by economists from public institutions and from the private sector, without losing sight of the fact that each corrective action has advantages but also undesirable effects in the short term and that it requires associated measures to reduce the burden on the truly vulnerable categories. Therefore, it is difficult to add anything new to this discussion without repeating many of the relevant things that have already been said often over the years.
“We face growing economic and geopolitical risks regionally and internationally, and foreign capital movements that have been favorable to us in recent years could reverse at any time, which could severely affect all segments of the economy. Romania currently has the lowest level of credit rating granted by the three main international agencies compared to Poland, the Czech Republic, Hungary, and Bulgaria. We have the lowest rating in the “investment grade” category,” Badea pointed out.
A further deterioration of investors’ assessments regarding the risks of investing in Romania would significantly affect us: it would reduce foreign direct investments that support the potential for growth of the local economy, which (along with the attracted European funds) sustainably finance the current account deficit; it would also increase the volatility and costs of foreign portfolio investments, an important part of which contributes to the financing of the budget deficit.
“It should be added here that the future flows of European funds which are, in most cases, free resources for financing investments for Romania depend to an important extent on these corrections.”
“Corroborating all the above, I think it is important to reiterate that we must make these corrections because Romania’s economy needs them and because in their absence it would be increasingly exposed to risks, to the loss of development opportunities, and to an (inevitable) structural slowdown of the growth rate which would be difficult to overcome”, Badea concluded.