At this moment, Romania seems to have two faces – on one side, rating agencies are no longer critical about the country’s debt service capacity and are praising its progress in restructuring the financial system – banking and non-banking alike.
On the other hand, domestic demand is in a continuous decline, and the slight stabilisation indicated by the latest press releases of the National Statistics Commission must first be confirmed as a stable trend.
The two faces can be encountered everywhere, but are perhaps best illustrated by the textile industry – so applauded for its record-breaking exports in the last few months. But the industry has the lowest salaries in the Romanian industry, which means you can export a lot and still be poor.
Two necessary distinctions
Recently, rating agency Standard and Poor’s made a decision that has run out of its habit, changing its rating outlooks to “positive,” which means that things should eventually go the right way for Romania.
But things should be treated with a cool mind, with certain distinctions required by the already ten-year-old history of our relationship with international financial markets. In principle, a rating is not designed to say whether a country’s economy goes right or wrong, but to state what chances a state has to repay debt to its creditors.
The English name, “sovereign risk,” clearly suggests what the rating refers to. His is the first distinction that separates an economy’s overall performance from the payment capacity of the Finance Ministry or the National Bank.
Of course, a country’s economic health overall and the state’s payment capacity are not exactly independent, but they are certainly distinct – they are superimposed only in a planned economy, and the tendency to confuse them betrays the incipient stage of the Romanian state in its “market” variant.
Moreover, the second distinction refers to the relationship between the private sector with the sovereign risk as rated by specialised agencies – which is even broader, as a good rating does not necessarily indicate the development of a broad private sector.
Pros and cons about state bonds
Regardless of these delicate but necessary distinctions, the Government has decided to borrow on international markets before the elections and before counting the end-year results. It is probable that progress already achieved in streamlining the payments balance, as in raising the currency reserve, could have been the basis of this decision.
The apparent rush, however, may highlight the intention to capitalise on a favourable moment. There are sufficient critics who see in Romania’s exports structure flaws that might affect its stability. Should this engine of the economy grind to a halt, it is probable that both industrial output and exports could recover, with visible effects on the Romanian state’s image before rating agencies.
Plans to launch Eurobonds as soon as possible could thus be interpreted as an attempt to borrow money at cheaper rates now, with the foreign image on the rise. A minor indulgence to inflation, to the extent to which inflation is still under the National Bank’s control, justifies this variant. In any event, there are enough reasons to sell bonds on the international market – since the interest rates are not exorbitant, as they have been in 1998.
One of the reasons is the improved maturity structure of public debt – at this moment, domestic debt is rather short-term. Seven-year bonds would improve the state of things and allow the Finance Ministry to take a stronger stand in negotiating treasury bond sales to banks.
There is criticism over real negative interest rates on the Romanian market, in particular about treasury bonds. In other words, it may happen that money raised on international markets could turn out to be more expensive than that raised domestically, even as nominal rates here go as high as 40% and more.
In any case, the counter-argument to this hypothesis is that the reorientation of public debt from the domestic market to the foreign one would allow interest rates to go even lower than they have until now.
At this moment, interest rates on the interbank market, as well as those offered by the Finance Ministry on six- and three-month bonds, seem to have fallen to a minimum and are even growing.
Given that the budget execution seems a little less strained than a few months ago, and inflation is certain to exceed the annual target, things could evolve in an opposite direction – leading the credit market again to high interest rates in absolute terms and positive in real terms. In this hypothesis, some money borrowed now for a longer term would serve the budget execution well.
When social considerations become economic ones
The distinction we mentioned – between state finances and an economy’s state of health – shows that rating agencies are looking at Romania’s foreign face, at the state’s pocket. This in no way involves the people’s wealth, and schematically could be limited to the budget execution.
For instance, the fact that unemployment has fallen in the last months from 11.9% to 10.6% can only be a good signal, given that it is not interpreted as stagnating reform or a seasonal phenomenon. It is a good sign because less unemployed mean less money from the state.
On the other hand, however, also in the latest months, the number of employed people has dipped – by 0.5% since the end of last year. The phenomenon bears some explanation in the limited duration of the unemployed status. But this indicator does not mean a lot to the country’s finances, at least not in the short term.
Moreover, while industrial output has grown against the drop in employee numbers, it can only be a good thing, meaning a rise in labour productivity.
Even through the overall perspective of the economy, not only from the narrow budget perspective, this is a good thing. But this good thing becomes bad in the long term, when social consequences gain an economic significance. Only in this perspective social indicators gain a strictly financial significance – which is never neglected by foreign investors, potential buyers of Romanian bonds.
Could the two sides be one and the same?
The mechanisms by which social indicators turn into financial perils are extremely varied, and can be easily detected in recent statistics.
The decreasing working pool only means a decline in the aggregate revenues of the populace, especially while pensions have not had any spectacular jumps and capital revenues can be neglected. Directly, domestic demand has suffered a decline, which has placed an ordeal especially on companies that have no access to exports.
When these goods are of strict necessity, such as energy, where there is no free market, this decline of solvent demand has translated into growing arrears.
Where there are at least rudimentary bases for the market, the decline in solvent demand translated into growing prices.
The following element is a hike of inflation above the stated limits and, with the constant depreciation of the national currency, an appreciation of Romanian salaries paid in hard currency.
This could have an impact on consumer imports, which could eventually cause the loss of the main pillar of credibility around which a functional economy is being articulated now.