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ROMANIA: TEN YEARS AFTER THE GLOBAL FINANCIAL CRISIS
Liviu Voinea, Deputy Governor, National Bank of Romania
Macroeconomics Panel - 2018 FP Investor Days
Your Excellencies,
Dear Guests,
Ten years ago, in mid-September 2008, the Lehman Brothers’ collapse became the trigger
of the global financial crisis.
The main cause of the global financial crisis was, in my opinion, excessive deregulation,
which fuelled speculative bubbles on many markets, primarily on the derivatives markets
comprising mortgages. That crisis has thrown US and EU in the midst of financial turmoil,
leading to recession, deflation, and forcing central banks to take unorthodox measures,
including quantitative easing, which led to negative real and even nominal interest rates.
Since then, US and EU have recovered, but the exit from these unorthodox policies proves
to be harder in the EU, particularly because some countries are not better off in terms of
public debt than they were before the crisis.
Emerging markets were hit even harder, and their resources for recovery were limited.
Everyone felt the wave of the global crisis, but in the case of some emerging markets that
was exacerbated by their domestic vulnerabilities. Today, this is more evident than before,
when we witness some emerging markets being hit not by a global crisis, but by their
in-built vulnerabilities.
This is why I would like to speak today about the Romanian economy, ten years after the
global financial crisis. Are we better off? Are we more protected against contagion
risks? Have we put in place stronger prevention mechanisms? Have the IMF/EU
2
financing agreements paid off? And what remains to be done in order to have our
house in order?
Romania itself faced a severe economic downturn which started in the fourth quarter of
2008 and continued until 2011 - first and foremost because of its domestic vulnerabilities.
In the year before the crisis, the current account deficit exceeded 13%, the structural
deficit was close to 9%, the economic growth was based on consumption of imported
goods, and it was driven by loose fiscal policy and by the credit boom based on foreign
exchange denominated loans, while the real estate bubble reached unprecedented levels.
All that it was needed for a crisis was a sparkle. That sparkle was the global financial
crisis, which led to massive speculative capital outflows, although the Vienna Initiative
was a useful tool for damage control in this region. The rest is known and I do not want to
insist upon it here. The diagnosis that I put in 2009, in my book “The end of illusion
economics. Crisis and anti-crisis” is still valid.
Since then, Romania witnessed a decade of major transformations. Under three successive
IMF/EU programs, we have made a long way to reform the economy and to make it more
resilient to further external shocks. In what follows, I will argue that Romania is now
more developed and better equipped to deal with external shocks than it was ten
years ago; but risks coming from unwarranted domestic policies remain. My
assessment is based on a longer time perspective and it may differ from a year on year
approach.
Romania is one of the few success stories of converging within the European Union, even
during and after the crisis. GDP per capita at PPS increased from 50.6% of EU average in
2008 to 62.5% in 2017. The real GDP was higher by 17.5% in 2017 as against 2008; and
the real potential GDP was 23% higher in 2017 as against 2008 (Figure 1). By the end of
2018, these figures will further grow by approximately 4 percentage points, according to
IMF and EC forecasts.
3
IMF/EU programs from 2009 to 2015 were successful in many ways, contributing to a
sharp adjustment in the budget deficit, exit from the Excessive Deficit Procedure in 2013
and reaching the MTO in the period 2013-2015. Structural reforms also advanced during
the programs, one indicator of these being the large reduction in public government and
state enterprises’ arrears.
Exports of goods and services doubled in the last ten years, from 38.3 billion euro in 2008
to 77.9 billion euro in 2017, while imports increased by only 42.7% over the same period.
CPI-based Real effective exchange rate (REER) is also lower than in 2008 (Figure 2).
Consequently, the negative contribution of net exports to GDP has diminished, and the
current account deficit witnessed a major adjustment of about 10% of GDP.
The net real wage was higher by 42.7% in 2017 as compared to 2008, while the number of
employees is also higher by 2.4% in 2017 compared to 2008. As social contributions and
other taxes were reduced, the increase in real wages was only partially mirrored by the
increase in compensation of employees. When compared against EU average, labor
productivity raised faster than compensation of employees over the entire period, therefore
the unit labor cost, relative to our main trade partners (EU), decreased by 7.7 percentage
points (Figure 3). This explains the positive dynamics of exports.
Public debt, as a percentage of GDP, is three times higher now than it was in 2008 (35% in
2017 compared to 12% in 2008), but this is a misleading figure for a number of reasons.
First, in 2008 and few years before that, Romania did not access international markets, by
its own choice, as it financed the deficit from one-off revenues. Second, international
reserves were 10 billion euro higher by the end of 2017 compared to the end of 2007
(Figure 4). International reserves include a foreign exchange buffer which has been built
since 2011, reached an average of 4 months of financing in 2013 and fluctuated around
this level since then. This buffer is the first line of defense against short-term external
shocks which may affect emerging markets, and our opinion is that it is a very good
instrument which needs to be preserved and consolidated.
4
Third, the financing gap is now much lower than it was when the crisis emerged: after
jumping in 2009 to 16.4% of GDP, it gradually decreased year after year, it went below
the 10% benchmark in 2014, then to 7.5% in 2017 and it stagnated now in 2018. (Figure
5).
Fourth, the refinancing risk has been significantly diminished as it is negatively correlated
with the average maturity. As of June 2018, the average maturity of Romania’s Eurobonds
is 9.7 years (Figure 6), and the investors base is much more diversified than in 2011.
Average maturity for local bonds doubled from 1.6 to 3.2 years, and the average maturity
of our debt is 6.4 years, compared to 3.8 years in 2011. Moreover, the share of public debt
with fixed interest rate is 90%, which reduces the interest rate risk on the stock of debt.
Regaining and consolidating our access to the international markets after the crisis has
been a major success of all governments and it is a sign of trust in our economy.
Another factor pointing towards lower contagion risk from external shocks refers to net
external debt. The net external debt is now lower than in 2008: 20.2% of GDP in 2017,
against 27% in 2008 (Figure 7).
The reduced contagion risk is also visible in the banking sector, through at least 5 key
indicators. Foreign denominated loans represent now only one third of the total stock of
loans, compared to two thirds prior to the crisis, therefore reducing the exposure of debtors
to foreign exchange risk (Figure 8). Financing from the parent banks are now 9 billion
euro (as of July 2018), compared to 26.1 billion euro in December 2008 (Figure 9).
Currently (as of July 2018), domestic deposits count for 70.9% of total banks’ liabilities,
whilst the foreign liabilities represent only 9% of total banks’ liabilities. Loan to deposit
ratio decreased from 122% in December 2008 to 75.2% in June 2018, showing that the
local deposits are now the main source of financing for banks. Of course, the higher
solvability ratio (Figure 10) and the much lower NPLs (Figure 11) also indicate that the
banking sector is more resilient now than ever to external shocks.
5
Even the high concentration of sovereign debt in the hands of local banks has a positive
side effect, which is the relatively low reliance on non-residents (they account for about
18% of the market).
These are all indicators of reducing the contagion effect by alleviating the risk of a sudden
reversal in the investors’ sentiment – which was described as a high systemic risk in the
latest Financial Stability Report of the National Bank of Romania.
Jerome Powell, the chairman of the Federal Reserve, referring to the assessment of risks in
emerging economies (2017), said that three elements are important:
first, the vulnerabilities in the EMEs themselves;
second, the evolution of advanced-economies monetary policies;
third, how markets might respond to that evolution.
Emerging economies are takers in the global markets; we cannot do much about the last
two elements mentioned above, which are exogenous.
Our duty is to prevent the accumulation of domestic vulnerabilities, because deterioration
in a country’s economic conditions makes it more vulnerable to adverse external shocks.
The main medium-term vulnerabilities of the Romanian economy refer to the
accumulation of the twin deficits when growth is above potential, to debt sustainability in
an adverse scenario, but also to the insufficient progress on structural reforms – all being
further constrained by the biggest loss of the last 10 years which is the loss of working
force through emigration.
Public debt is now sustainable, but a word of caution is needed with respect to an adverse
scenario in which the structural deficit does not return to the MTO. As our model shows
(Figure 12 and 13), medium term debt sustainability is ensured only by returning to the
medium term budgetary objective.
6
The structural budget deficit has been deviating from the MTO (1% of GDP) since 2016.
Nowadays structural deficit is, however, the cash deficit of tomorrow, which will need to
be financed under circumstances that may turn unfavorable for emerging economies
(Figure 14). The recent economic deceleration from 6.9% in 2017 to 4.2% y-o-y in first
half 2018 is a double edged sword. On the one hand, it represents a slowdown compared to
last year. On the other hand, it brings growth towards its potential, therefore reducing the
output gap and making growth more sustainable. But, as former US President Harry
Truman said, “All my economists say on the one hand…on the other hand…Give me a
one-handed economist!”.
The current account deficit, although much lower than prior to the crisis and below its long
time trend of 4% of GDP, remains a concern because our peers are recording current
account surpluses in these years (Figure 15). However, it remains fully financed from
autonomous flows (FDI and European funds) (Figure 16). Let me make two remarks here.
The FDI flows, although lower than prior to the crisis, are much more stable, as they only
comprise of equity and reinvested profits (especially after mid-2014), while short-term
intra-company loans have practically vanished. As for the European funds, in the last 10
years, more than 40 billion euros entered the country, representing a factor of the increase
in the monetary aggregates.
This brings me to the issue of inflation. Price stability is our main task and I think we did a
good job, given the circumstances. Last year the inflation target was met. This year, after
a fast raise in inflation mostly due to administered prices and imported inflation, we saw
that inflation stagnated in June and then went down in July, following our three interest
rate hikes in the first four months of the year and subsequently more firm liquidity
management. CORE 2 adjusted inflation, an indicator that excludes highly volatile prices,
has been decreasing since May (Figure 17). We are confident that inflation will reach our
target by the end of this year, even if that would be at its upper bound. Next year, we
expect inflation to go down close to 3%, but, as always, our predictions are not interest
rate policy-neutral.
7
What is important to emphasize is that investors are discriminating among emerging
economies, and for good reasons. Romania belongs to the group of Central Europe, with
lower exchange rate volatility than its peers and slightly higher yields and interest rates
than them, but very far away from the troubled emerging markets (Figure 18, 19, 20 and
21).
Nevertheless, there is no time for complacency. And there is no room left for demand-side
measures in the absence of supply side policies aimed at increasing potential GDP, and at
improving the utilization of factors.
Structural reforms are incomplete and a possible roadmap for euro-accession or just for
further convergence cannot be done without a detailed program of these reforms which
should cover governance issues (both in the public and private sectors), investment
prioritization, better tax collection, broader reporting, centralized procurement, addressing
the issue of companies with negative capital, and much more.
In the financial sector, the recent Financial Sector Assessment Program undertaken by the
IMF and WB has issued a number of recommendations for structural reforms, including a
series of macroprudential policies which the National Bank has already started to
implement.
Agustin Carstens, General Manager of the Bank for International Settlement, said at the
presentation of the 2018 Annual Report in Basel: “We must seize the day. Addressing
vulnerabilities is key to keeping the growth momentum on track. The stronger
performance gives us a window to pursue necessary reforms and recalibrate policies. Let’s
not miss this opportunity”.
On this note, let me conclude here and wish you all not to miss the opportunities.
Figure 1. Real and potential GDP*
1030
1035
1040
1045
1050
1055
10602
00
8Q
1
20
08
Q3
20
09
Q1
20
09
Q3
20
10
Q1
20
10
Q3
20
11
Q1
20
11
Q3
20
12
Q1
20
12
Q3
20
13
Q1
20
13
Q3
20
14
Q1
20
14
Q3
20
15
Q1
20
15
Q3
20
16
Q1
20
16
Q3
20
17
Q1
20
17
Q3
20
18
Q1
GDP Potential GDPSource: NBRNote: *logarithmic scale = computed as 100*log(GDP at constant prices)
Source: BIS, NISNote: REER – 61 economies
Figure 2. Trade balance and the REER
0
20
40
60
80
100
120
0
10
20
30
40
50
60
70
80
90
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Exports of goods and services Imports of goods and services REER CPI_based (rhs)
Billion euro Index
Figure 3. Unit labor cost relative to EU
40
50
60
70
80
90
100
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Compensation per employee (% EU, PPS) Labour productivity (% EU, PPS)
ULC RO (% EU, PPS) (3=1/2)
percent
Source: Eurostat, NBR calculations
Figure 4. International reserves
Source: NBR
0.0
10.0
20.0
30.0
40.0
50.0
Au
g-0
8
Nov-0
8
Fe
b-0
9
Ma
y-0
9
Au
g-0
9
Nov-0
9
Fe
b-1
0
Ma
y-1
0
Au
g-1
0
Nov-1
0
Fe
b-1
1
Ma
y-1
1
Au
g-1
1
Nov-1
1
Fe
b-1
2
Ma
y-1
2
Au
g-1
2
Nov-1
2
Fe
b-1
3
Ma
y-1
3
Au
g-1
3
Nov-1
3
Fe
b-1
4
Ma
y-1
4
Au
g-1
4
Nov-1
4
Fe
b-1
5
Ma
y-1
5
Au
g-1
5
Nov-1
5
Fe
b-1
6
Ma
y-1
6
Au
g-1
6
Nov-1
6
Fe
b-1
7
Ma
y-1
7
Au
g-1
7
Nov-1
7
Fe
b-1
8
Ma
y-1
8
Au
g-1
8
Gold Foreign currency reserves
EUR bn.
Figure 5. Financing gap
Source: MPF
4.3%
6.4%
16.4%
14.8%
13.0%
11.5% 11.6%
9.0% 8.8% 9.1%
7.5% 7.6%
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f
percent of GDP
Figure 6. Average maturity of Romania’s public debt
Source: MPF
4
4.1 4.4
5.35.7 5.8 5.9
6.4
3.8
5.86.2
7.27.8 8 8.1
9.7
1.6 1.72.4
3 33.5 3.3 3.2
0
2
4
6
8
10
12
2011 2012 2013 2014 2015 2016 2017 Jun-18
average maturity total debt average maturity eurobonds average maturity local bonds
percent
Figure 7. Net external debt
Source: Eurostat
27.0
32.0
36.037.7 38.4
35.8
29.8
27.2
22.420.2
0
5
10
15
20
25
30
35
40
45
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
percent of GDP
Source: NBR
Figure 8. Stock of loans, by currency
45.8 42.2 39.7 36.7 36.3 37.3 38.8 43.550.3
57.1 62.9 65.6
54.2 57.8 60.3 63.3 63.7 62.7 61.2 56.549.7
42.9 37.1 34.4
0
10
20
30
40
50
60
70
80
90
100
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jul.2018
Share of local currency loans Share of foreign currency loans
percent
Source: NBR
Figure 9. Structure of banks’ funding
0
50
100
150
200
250
300
350
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
Mill
ion
s
Foreign liabilities Domestic deposits
RON bln.
Source: NBR
Figure 10. Solvency ratio of the banking system
8
10
12
14
16
18
20
mar
.-0
8
sep
t.-0
8
mar
.-0
9
sep
t.-0
9
mar
.-1
0
sep
t.-1
0
mar
.-1
1
sep
t.-1
1
mar
.-1
2
sep
t.-1
2
mar
.-1
3
sep
t.-1
3
mar
.-1
4
sep
t.-1
4
mar
.-1
5
sep
t.-1
5
mar
.-1
6
sep
t.-1
6
mar
.-1
7
sep
t.-1
7
mar
.-1
8
Solvency ratio Minimum regulatory capital requirements = 8%
percent
Note: Solvency ratio = Total own funds/ Risk weighted assets
Source: NBR
Non-performing loans
51
52
53
54
55
56
57
58
59
60
61
0
5
10
15
20
25
Sep
. 20
14
Dec
. 20
14
Mar
. 20
15
Jun
. 20
15
Sep
. 20
15
Dec
. 20
15
Mar
. 20
16
Jun
. 201
6
Sep
. 20
16
Dec
. 20
16
Mar
. 20
17
Jun
. 201
7
Sep
. 20
17
Dec
. 20
17
Mar
. 20
18
Jun
. 201
8
NPL ratio (NBR definition) NPL Coverage Ratio (rhs)
percent percent
60
70
80
90
100
110
120
130
Dec
. 20
07
Au
g. 2
008
Ap
r. 2
009
Dec
. 20
09
Au
g. 2
010
Ap
r. 2
011
Dec
. 20
11
Au
g. 2
012
Ap
r. 2
013
Dec
. 20
13
Au
g. 2
014
Ap
r. 2
015
Dec
. 20
15
Au
g. 2
016
Ap
r. 2
017
Dec
. 20
17
percent
Source: NBR
Loan-to-Deposit ratio, %
Figure 11. LTD and NPL ratio
Source: NBR
International comparison – the level of the signal
threshold in the case of public debt
(regression model)
Empirical model
𝑦𝑖,𝑡= 𝑝𝑢𝑏𝑙𝑖𝑐_𝑑𝑒𝑏𝑡𝑖,𝑡−4 + 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡𝑖,𝑡−4 + 𝑐𝑜𝑛𝑠𝑢𝑚𝑝𝑡𝑖𝑜𝑛𝑖,𝑡−4 + 𝑏𝑢𝑑𝑔𝑒𝑡 𝑏𝑎𝑙𝑎𝑛𝑐𝑒𝑖,𝑡−4+ 𝑟_𝑑𝑜𝑏𝑖,𝑡−4 + ℎ𝑖𝑐𝑝𝑖,𝑡−4
Structural Model 𝐷𝑡−1 𝑠𝑡 = 𝜏𝑡 − 𝑔𝑡 + σ𝑗=1∞ 𝛽𝑗𝐸𝑡
𝑢′ 𝑦𝑡+𝑗−𝑔𝑡+𝑗
𝑢′ 𝑦𝑡−𝑔𝑡𝜏𝑡+𝑗 − 𝑔𝑡+𝑗
Source: NBR
Calibrating the optimum level of the public debt
using the general equilibrium condition
(structural model)
Figure 12. Public debt sustainability assessment
0
10
20
30
40
50
60
70
80
90
100
LV BG SI RO CZ HU
Public debt level Signal threshold (regression model)
percent of GDP
• For Romania, public debt level > 43% of GDP would lead to risk of recession > 50%
Figure 13. Public debt sustainability in the long run
Note: 1) Public debt interest payments as a ratio to average public debt in 2014.
2) The primary government budget balance of 0.3 percent of GDP corresponded to a structural deficit of around 1 percent
of GDP (MTO – Medium-Term Budgetary Objective) in 2014.
3) 2.8 percent is the real growth rate in 2014.
Source: MPF, NBR calculations
1st Scenario(decreasingpublic debt)
2nd Scenario (stabilizingpublic debt)
3rd Scenario(rising public debt)
Interest rate on public debt (%)
3.9 1) 3.9 3.9
Primary balance (% of GDP)
-0,3 2) -1,0 -2,5
Real economic growth rate (%)
4,5 3) 4,5 4,50
10
20
30
40
50
60
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8Public debt/GDP Scenario 1 Scenario 2 Scenario 3
percent of GDP
Public debt critical threshold
Maintaining the deficit within the limits set by the MTO (medium term objective) ensures long-term
sustainability of public debt
Source: Eurostat
Figure 14. Budget balance
-2.2
-4.2-4.8
-8.1-8.8
-5.4
-2.9-2.5
-0.9-0.3 -0.2
-2.1
-3.3
-10
-8
-6
-4
-2
0
2
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
budget balance ESA structural budget balance primary budget balance
percent of GDP
2013 - 2015 at MTO
Source: IMF
Figure 15. Current account balance - regional comparison
-25
-20
-15
-10
-5
0
5
10
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Romania Bulgaria Croatia Czech Republic Hungary Poland
percent of GDP
Current account deficit and non-debt-generating flows
-16
-12
-8
-4
0
4
8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Q1(4Q
movingaverage)
Capital account balance* Direct investment, equity (including reinvested profit)
Current account balance Net lending (+) / borrowing (-)**
% nominal GDP
* Mainly European structural and investment funds** Current account balance + Capital account balance
Source: NBR
Source: NBR
-4
-2
0
2
4
6
8
10
12
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
p
20
18
H1
p
Equity investments Reinvested profit Debt instruments (intercompany lending)
EUR bln. Structure of FDI (%)
Figure 16. Current account and FDI
Figure 17. Inflation will stay in the target band in 2018 and 2019
Source: NIS, NBR
CPI inflation CORE 2 adjusted inflation
Figure 18. Exchange rate evolution
0
50
100
150
200
250
98
99
100
101
102
103
104
105
106
107
1-Jan-18 1-Feb-18 1-Mar-18 1-Apr-18 1-May-18 1-Jun-18 1-Jul-18 1-Aug-18
EURRON EURPLN EURCZK EURHUF EURTRY (rhs) EURARS (rhs)
1 January 2018 =100
Source: Reuters
Figure 19. 5 year yield of FX government bond
-1
1
3
5
7
9
11
29-Dec-17 29-Jan-18 28-Feb-18 31-Mar-18 30-Apr-18 31-May-18 30-Jun-18 31-Jul-18 31-Aug-18
PL_5Y(eur) CZ_4Y(eur) RO_5Y(eur) TR_5Y(usd, rhs) AG_8y(usd. rhs)
Source: Bloomberg
Figure 20. 10 year yield of FX government bond
0
2
4
6
8
10
2-Jan-18 2-Feb-18 2-Mar-18 2-Apr-18 2-May-18 2-Jun-18 2-Jul-18 2-Aug-18
PL_10Y CZ_18Y RO_10Y TR_10Y(usd, rhs) AG_10Y(usd, rhs)
Source: Bloomberg
Figure 21. Monetary policy interest rates
0
10
20
30
40
50
60
1-Jan-18 1-Feb-18 1-Mar-18 1-Apr-18 1-May-18 1-Jun-18 1-Jul-18 1-Aug-18
CZK ARG(rhs) TRY(rhs) PLN HUF RON
Source: Reuters
