In the past few years the Romanian state has preferred to rely on bank financing and not compete against banks for resources by launching its own investment instruments dedicated to individuals. However, this approach is supported by the International Monetary Fund.
Other European countries, including neighboring ones, believe financing from the population is important. Although it may be more expensive, it is also more reliable, especially at a time when foreign capital can prove extremely volatile.
In the last few months demand from foreign investors for Romanian government bonds in lei has surged after Barclays and JP Morgan announced Romania’s inclusion in two of the most followed reference indexes in the region.
In money terms, this interest means foreign currency inflows of between EUR3 and EUR4 billion since the beginning of the year which on the forex market meant a fast appreciation of the Romanian currency to around RON4.30 per euro. Foreign investors now account for over 20% of the public debt after in 2012 their holdings had plummeted towards 5% of the total amid the political crisis and the eurozone crisis.
However, this money, which entered the market during a short span, can leave the market just as fast, and can deal shocks both to the exchange rate and to the government bonds market. “[Non-residents’ high demand for these government bonds can cause the appreciation of the Romanian currency and cut the yields of these instruments to unattractive levels. This could be followed by capital outflows and destabilize the internal market of government bonds,” say the authors of the public debt management strategy.
(English version by Daniela Stoican)