Romania lacks a plan B to respond to foreign shocks

Romania’s major problem in the current international context is its lack of a “plan B” that should enable it to counter the effects of some possible foreign shocks that may occur given the vulnerability caused by constant widening of the current account deficit and relaxed fiscal policy, states Mihai Tanasescu, Romania’s representative to the IMF.
“At present, the macroeconomic outlook is positive, but several potential risks have accumulated, and once they turn into realities, they could rapidly worsen the situation. The most dangerous aspect is a domino effect; once they start, corrections follow one after another, so prudence is often the best solution. Unfortunately, the Government does not have a strategy to respond to a potential shock, based on local realities,” Mihai Tanasescu, a senior adviser with the IMF and a former Finance Minister, told ZF.
Tanasescu is currently in Bucharest with the IMF mission assessing recent macroeconomic developments and discussing, with the Government, a forecast for the 2008 budget.
“The subprime crisis will continue for a long period and Romania will not be able to avoid the fallout from a volatile foreign environment: primarily the rising costs of foreign financing sources and their decline, which will be reflected in an economic slowdown,” said Tanasescu.
He believes the possible effects of an economic slowdown in Western European states, which are the main markets for Romanian exports, must also be considered, and highlights the downward trend of foreign direct investments.
This would mean foreign deficit would become increasingly financed on foreign debt, at higher costs because of the foreign context.
“Romania must be ready with a medium-term economic strategy so as not to be taken by surprise by adverse foreign developments,” added Tanasescu.
With regard to the specific effects the foreign liquidity crisis may have on the Romanian financial system, Tanasescu considers the banking system will not have any problems with sustainability, but profits will be affected.
Amid rising “clear inflationary pressures”, Tanasescu believes the 2008 budget should be the anchor that restrains inflation, reaffirming IMF’s constant view: “wage policy has a crucial role”.