Analysis: Romanian Economy Loses Confidence of Foreign Investors

Recently, one piece of concerning news for the Romanian economy went almost unnoticed: the direct investments in the country are exceeded by personal remittances of the Romanians working abroad. This happens for the first time. In other words, Romanians who went to work overseas are the biggest foreign investor in the country.

This is huge. Even though no one says it bluntly, it shows that investors have started losing confidence in the Romanian economy. Romania is borrowing at the highest interest rates in the European Union. Namely, 5.37%. The last time Romania borrowed that high was in 2013, when the interest rate was 5.43%. As a comparison, countries like Germany borrow money at negative interest.

A month ago, in December, Nomura Bank issued a warning: the Damocles Index, which measures the risk of an exchange crisis, went above 100 points for Egypt, Romania, Turkey and Sri Lanka. In Turkey, we all see what is happening with the lira. In Romania, it’s still calm, but the National Bank of Romania is constantly increasing the interest policy rates. Last time the monetary policy rate reached 2%.

Inflation is skyrocketing with the energy prices soaring rapidly, and it’s already reached 7.80% in November. It’s hard to believe that the Government will keep inflation at 5.8% in 2022, as mentioned in the public budget plan for this year.

Former Romanian PM: ‘Romania could be forced to ask for an emergency loan from the international financial institutions’

With all the above in mind, let’s analyze some of the former Romanian prime minister’s recent comments, Mr Florin Citu. Now that he isn’t responsible for the economy’s fate, he feels free to speak the truth about what’s happening.

There is one more thing, of vital importance. The confidence of the investors in Romania’s Government. Without their confidence, in the current global context, Romania could be forced to ask for an emergency loan from international institutions.

Florin Citu, former Prime Minister and current Natioal Liberal Party leader

The idea of an IMF deal for Romania is not new. In September 2020, in a plain pandemic, rumours already appeared. Yet, the Romanian officials denied any possibility for this to happen.

The situation now is quite different. Romania is borrowing heavy, but it does it at the highest rate in the Union. Also, the tough times are closer than ever, with lots of small and medium businesses directly hit by the sharp rise of energy and gas prices. All these business owners think twice before paying any taxes, which leads to the diminishing of the public budget and, consequently, to less leverage for the Government to handle the crisis.

The unemployment rate is also expected to rise, and families will find it harder to make a living. All those remaining jobless won’t contribute to the public budget, and that’s how a loop is closing.

Will Romanians continue working abroad and sending money to the country, thus contributing to Romania’s GDP? Possibly, but this won’t ever save the economy from collapsing if appropriate measures aren’t taken.

Florin Citu warned the Liberals, now leading the country, about two ways of fixing things, both in the National Bank of Romania’s responsibility: weakening the local currency or soaring the monetary policy rate even more. Either way, it spells tough times for the average Romanian worker. Meanwhile, these harsh measures could save the economy.