The public debt increase can seriously complicate things in the future, particularly because of the slimmer prospects for economic growth and the relapse into recession.
From the end of 2010 through October 2011, when the Finance Ministry released its latest figures, Romania’s public debt rose by 17.1 billion lei (EUR4 billion) or 0.7% of the gross domestic product. Therefore, the public debt went up from RON194.4 billion at the end of 2010 to RON211.5 billion in October. The government debt stood at 38.6% of the gross domestic product at the end of October, from 37.9% of GDP in December 2010.
The growth pace may not seem much because it has to do with the performance of the economy. In other words, if there is significant economic growth, the debt as a percentage of GDP will go down. Anyway, it appears to be manageable now, considering how things stand in Western Europe, where debt usually amounts to 80% of GDP.
However, looking at the progression of this debt over time, things are different. That is because Romania’s public debt surged in a few years from 12.4% of GDP in 2006 to 37.9% at the end of 2010 and 38.6% in the first ten months of 2011, thus tripling in less than five years. As a result, interest spending tripled as well, to RON10 billion a year.
Romania will have to borrow a further RON11.2 billion next year, which will add up to the public debt to cover the budget deficit, whose target was set at 1.9% of GDP. It will also have to find another about RON60 billion to roll over maturing debt.
An important factor will be the borrowing costs, because they will further influence interest spending. As economic growth is uncertain, the level of debt as a percentage of GDP will increase, too. Analysts warn that with countries like Romania, investors become nervous when public debt reaches 40% of GDP. This means higher borrowing costs, which translate into an additional burden on the government or even the inability to borrow further.
Once in the vicious circle of debt, getting out of it becomes tricky. Greece is a case in point. In five years, from 2005 through 2010, its debt surged from 100% of GDP to 150%. In the first six months of 2011, the country’s debt increased further by 10 percentage points to 160% of GDP, due to the unprecedented collapse of the economy. Greece is practically caught in a deadly trap. The state is simply not making enough revenue to pay the debt service. Greece had EUR100 billion struck off its debt, but still finds it hard to deal with the rest.
Public debt rises with deficit, but may go down as a percentage of the GDP if there is robust economic growth. Romania cannot expect miracles to happen next year and there are no certainties for the following years. As such, it will have to be very careful to its spending and loans in 2012.
The fact that the authorities set out to achieve a zero budget deficit in 2013 shows they realize, at least in theory, how things stand. Yet if looking at other indicators, one can see that governmental spending other than investment has remained constant for years.
Spending on goods and services amounts to about EUR6 billion (5%-6% of GDP) a year, while investments went down during the crisis. The government needs to reverse the trend: spend less on what the authorities use and more on investments.
(English version by Loredana Fratila-Cristescu)