The issue of Romania’s external debt has been mentioned several times in this column, especially after 2016, when its level quickly exceeded the threshold of 90 billion euros. At that time, the actual level was considered “”near the edgeAnd measures were recommended to control the rate at which the debt was growing. It seems that the Romanian authorities have not focused on this and the 2020 pandemic has placed Romania in a difficult position from this point of view. A year ago, in November 2019, a new government led by the National Liberal Party was formed and it was hoped that foreign debt would be brought under control. But it was not to be. As shown below, the actual level has increased quite rapidly over the past year. The ratio of external debt to GDP is estimated to have risen from 48% to over 56%. This is a significant increase, which has also been accelerated by the decline in GDP this year. The IMF has predicted that Romania’s GDP will contract this year by 4.8%. There are more alarming estimates of up to -10% as the pandemic continued to evolve uncontrollably in the fourth quarter of 2020.
Another major risk in the fight to control the spread of the disease is the upcoming legislative elections on December 6. The new level of external debt of 117.2 billion euros (including 83.6 billion euros in the long term) was rightly pointed out by the National Bank of Romania (BNR) in November of this year, but nothing no guarantee that politicians will listen to central banks. This is normally the fate of these correct signals during election periods, but the risk of too high a foreign debt is too high to ignore. The gap between the level of external debt and international reserves (excluding gold) has widened as shown in Chart 1 below.
Table 1: Romania – Main external indicators, November 2019 – October 2020, € bn
Source: Calculated from the BNR database; The INS GDP figure for 2019 is provisional and for 2020 is an unofficial estimate.
There are currently intense debates in Romanian society regarding the current level of external debt, the fact that such a large debt has been contracted mainly for consumption rather than for investment, the cost of borrowing to the foreigner rather than access to EU funds destined for Romania and, more importantly, on who will pay this large debt. The most striking feature of Romania’s debt is the increase in its public share, which is the external debt contracted directly by the Ministry of Public Finance and local public administrations (€ 49.1 billion at the end of September 2020 compared to € 39.4 € bn at the end of 2019).
Chart 1: Romania: External debt, international reserves and gold, € m
Source: Calculated from the BNR database
This debate is not new. Even in socialist times, the level of foreign debt was an obvious concern for large segments of the population. During the recent publication of some files of the Securitate (secret service), a case was revealed concerning a demonstration in Brasov of ordinary citizens regarding the high level of foreign debt in 1981 (see Fig. 1 on the left).
Figure 1: Romania – A page from a Securitate file (1981) on external debt and gold objects
Source: CNSAS – Selection from the files of the former Securitate – 2020 and of the National Museum of Romania
However, the level of this indicator was then only $ 10 billion. Now, at 117 billion euros, the level of external debt does not seem to be a priority for the Romanian authorities, who borrow mainly in foreign and domestic currencies at a rate of nearly 1 billion euros per month. However, future generations will have to pay it back.
Among all this worrying news, there is a glimmer of hope linked to the price of gold on international markets (see graph 2). Romania currently holds 103.6 tonnes of gold valued at more than 5.35 billion euros (market price at the end of October 2020). With foreign currency reserves at 33.7 billion euros, total international reserves stood at 39.1 billion euros at the end of October 2020 (around 33% of its total gross external debt). This good report must be kept.
Chart 2: Gold – Gold quotes in London, November 2019 – November 2020, USD / troy ounce
Source: BBC Market Data (WebFG – AM), November 16, 2020
The history of Romanian gold is extremely convoluted, dating back to Roman times. Nowadays, it started with the transport of all Romanian gold to Moscow during WWI (WWI) in 1916-1917. It consisted of more than 100 tons of gold bars, precious coins and other items of national heritage, including personal property and documents of Queen Mary of Romania. Only a few items (see Figure 1 on the right) were returned. Soviet authorities have repeatedly stated that they have no knowledge of the fate of the Romanian treasury. More than 100 years later, Romania is still deprived of its former national treasure which, at current market prices, would be valued at more than 5 billion euros. At a high price, the lesson has been learned. During World War II (WWII), Romanian gold was well hidden in the country in a cave in the Tismana Monastery (see Fig. 2).
Figure 2 – Romanian gold during WWII at Tismana Monastery
Source: Author’s collection – 2020
This turned out to be much safer, as all the gold was returned to the BNR coffers. Later, a part was deposited abroad in London at the Bank of England. Regardless of the price (which will likely continue to fluctuate) gold has played and will continue to play a key role in securing Romania’s external balance.
Shortly after Romania began its transition to a market economy in December 1989 with zero foreign debt, international reserves of $ 1.89 billion and $ 100 million in gold, the attitude of the Romanian authorities was that we need to borrow to modernize the agro-industry of the country. potential and infrastructure and stimulate consumption. This has been well understood. Then, many governments came to power with promises to reopen the economy and stimulate investment. However, investments have not materialized in all sectors or have been insufficient. On top of everything, the 2020 pandemic severely affected the Romanian economy and society. Borrowing (internal and external) has continued at a much faster pace, but as soon as the pandemic is over (hopefully early 2021), measures should be implemented to control external debt. Access to EU grants and / or repayable funds, including those designated by the EU to tackle the current pandemic, should be a high priority for the government. Any delay in this regard, as recorded in the past, will not help Romania or its industrious people.
Alexandru M. Tanase is an independent consultant and former associate director, senior banker at the EBRD and former adviser to the IMF. These are personal opinions of the author. The assessments and opinions expressed are not those of the EBRD and / or the IMF and / or the BNR and / or any other listed institution. Assessment and data are based on information as of November 2020.