The public debt continued to increase at a fast pace in the first quarter of this year, leaping by around 12.4 billion lei (almost EUR3 billion), compared with the end of last year, as the Finance Ministry pursued a policy of tapping the markets aggressively, for fear of access to liquidity being blocked.
During the crisis years, the Romanian authorities have not managed to stabilize the rise of the public debt. The higher the public debt, the higher the perceived risk and the cost of borrowing on external markets. An economic increase by rates above 2% and the continued reduction of the budget deficit are two ways of capping the debt at a reasonable level, acceptable to investors.
Analysts believe the debt’s growth trend is not likely to continue over the coming period considering that the acceleration of the debt in the first quarter was determined by the need to consolidate the liquidity reserve for situations of high volatility, and is not the result of fiscal slippages.
“The rise of the public debt in the first quarter, by RON12.4 billion, was determined by the issuing of dollar-denominated bonds, as well as by loans on the internal market, denominated in lei for the amounts initially planned and much higher than the value of the bonds maturing at the time,” said Catalina Molnar, senior economist with RBS Bank.
The high growth rate of the debt in the past few years, which had become worrying in 2010, bringing the public debt to close to 40% of GDP, showed signs of toning down in 2011 and at the beginning of this year. But, after the public debt fell in January 2012, in February it resumed its rise, leaping by RON10 billion against January, and in March rose by nearly RON5 billion. So, at the end of the first quarter, the public debt reached RON235.2 billion, accounting for around 38.6% of GDP. Last year the share of the public debt to GDP rose to 38.5%, while the budget deficit fell to 4.1% of GDP. This year, the budget deficit is set to fall to 2.1% of GDP.
Whereas between 2003 and 2006 for instance, the growth rate of the public debt from one year to the next did not exceed 10%, between 2009 and 2010 the annual growth rate sped up beyond 30%. Last year the public debt leaped 14.5%, with the first-quarter growth amounting to 5.6%.
As for the rise of the public debt in the first quarter, the head of the Fiscal Council explained this was the result of the loans that made up the Finance Ministry’s liquidity buffer.
“The buffer was created by borrowing. This is a positive thing, despite the growth of the public debt. Now the Finance Ministry is in a position where it can withstand market turmoil.” He says this was a very wise decision of the Finance Ministry to borrow when markets were calm and access to the markets was relatively easy. “Now costs have risen. We have the comfort and can afford the luxury of staying out of the markets for 4-5 months,” Dumitru says.
Molnar of RBS Bank also believes the higher growth of the public debt in the first quarter had to with the buffer agreed under the arrangement with the IMF and the EU.
“So this trend should not continue, all the more since the 1Q evolution was intensified by the need to consolidate a buffer for turbulent times, not because of fiscal slippages.”
The reserve in the accounts of the Treasury reached EUR5 billion and RON7 billion lei, as former Finance Minister Bogdan Dragoi said.
How the debt can be stabilized
Analysts believe the reduction of the budget deficit below 3% of GDP and the resumption of economic growth by rates of 2-3% could lead to a stabilization of the public debt below 40% of GDP. But if the economy faces new recession risks in 2012 and the deficit reduction becomes even more difficult, the stabilization of the public debt could occur much further into the future. The equation is made more complicated by this year’s elections, with Romania having a history of slippages in election years.
In theory Romania still has room to increase its debt before it reaches the 60% of GDP cap, considered until not long ago a healthy standard in Europe, according to Maastricht criteria, but the problem is the acceleration of the growth rate and where the money is going.
An important aspect in the management of the public debt is to increase its maturity, with a slight improvement being noticed in this regard.
(English version by Daniela Stoican)