The fast-paced increase of foreign debt is fuelling pressures for a depreciation of the RON because of the repayment/refinancing effort.
Romania’s medium and long-term foreign debt skyrocketed from 30% of the Gross Domestic Product in 2007 to 50% at the moment, reaching an all-time high of 57 billion euros at the end of June.
The need to finance the skyrocketing budget deficit becomes the main growth driver, swallowing money indiscriminately from banks, the IMF, the EU and the international market.
Romania is thus ‘catching up’ fast with the countries in the ranking of those with the highest foreign debt as percentage of GDP in the region, and risks having to allocate more resources to repayment of loans than to investments, once it has overcome the crisis.
President Traian Basescu says that excessive indebtedness should be avoided, as it would hinder economy relaunch, adding that Romania could refrain from drawing all the money from the IMF loan.
Total foreign debt includes the first 4.8 billion-euro tranche of the IMF loan, as well as a private debt that is constantly rolled over. NBR’s foreign reserves in turn reached a 27.3 billion-euro all-time high in July, also because of the IMF and EU money. "The speed of the debt increase over the last few years can be regarded as the main risk factor for our economy amid the financial crisis, which caused a sudden drop in financing, a fleeing of capital, and brought up again what we thought was no longer a threat for us: the foreign currency constraint," believes Daniel Daianu, economics professor and former Finance minister. Foreign currency constraint means that a change of direction of capital flows "can cause very heavy damage, considering some countries had to resort to completely unconventional methods to avoid default," Daianu adds.
"Eventually, the pressures for the depreciation of the RON will come from the foreign debt accumulated until now, which has to be repaid or refinanced," comments Catalina Molnar, senior economist of RBS Bank Romania. On the other hand, she believes that the significant decline of the current account deficit indicates that foreign debt will no longer grow as fast as until now.
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