romania's current account deficit

8/12/2019 romania's current account deficit

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S O U T H E A S T E U R O P E A N I S S U E S

Is the Current Account Deficit a Problem for Romania?

Ana Bal

Received: 1 May 2008 / Accepted: 14 June 2008 / Published online: 11 October 2008 Springer-Verlag 2008

Abstract The current account deficit of Romania, both significant in size and

persistent, has been a worrying issue affecting the countrys economic and financial

macro-stability also in the medium and long term. This paper sets out to review the

causes of that phenomenon and its coverage resources during the last 2 years, 2006

and 2007, while the final part deals with the potential developments of said

parameters during the post European Union accession period, as well as of their

respective influential factors.

Keywords Current account deficit Commercial deficit

Currency overappreciation Foreign direct investment Accesion to EU

JEL Classification F32 G38 P33

Introduction

Is the current account deficit to be perceived as a critical problem of Romania? How

will the countrys accession to the EU influence the evolution of such imbalance

during the years to come?

The current account deficit has been increasing ceaselessly beyond 2002 (see Fig.1

in Appendix). It maintained the deepening trend as a share of gross domestic product

(GDP). Its proportions became worrying ever since 2006 when it soared to over 10% of

the GDP. By the end of 2007 it was estimated to be about 14% of the GDP (some

16.9 billion Euros in absolute value) by the National Bank of Romania (2008).

At a first glance, the concern related to the current account deficit might seemto be the effect of ignoring the operation mode of an open economy. In such an

A. Bal (&)

Academy of Economic Studies, Bucharest, Romania

e-mail: [email protected]

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Transit Stud Rev (2008) 15:499510

DOI 10.1007/s11300-008-0024-3


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economy, when the domestic savings do not cover the expenses (investments), the

economy could find the resources necessary to finance the difference abroad, either in

the international financial markets or by attracting foreign portfolios or direct

investments (Krugman and Obstfeld2006). Even if, in theory, such an assessment is

a correct one, in reality, continuing to consume more than ones own incomes wouldhave a worrying impact from a certain level. The main reason is that this

consumption charges the incomes of the future generations, who shall however have

to pay for the current expenses in time. Additionally, building up foreign debts on the

grounds of internal or external deficits up to a certain proportion (of the GDP), might

have an impact on the countrys financial stability in both the medium and long term,

as well as on the perceptions of foreign investors with respect to the country risk.

Also, if the international background were to evolve unfavourably on the overall

world economy (just like the situation at the beginning of 2008), or in relation to

international financial markets, a large deficit of current account would become animbalance difficult to cope with not only in the long term, but even in the short term.

Romania is an open economysince September 2006 its capital flows are totally

free, while its total foreign trade has exceeded 75% of GDP (Isa rescu 2007)

meaning that the above theoretical assertions apply to our country as well.

Romanias current stage of economic modernization and permanent growth might

lead to the understanding that the existence of a large deficit of current account is no

issue at all. However, as Cojanu and others (2006) put it: Romania obviously

has a problem related to the level of its savings, which is reflected in the current

account deficit

while a deep decreasing of its savings ratio triggers up the problemof just how sustainable the financing of investments from external savings proves to

be (capital inflows). If we were to also consider the fact that investments are

oriented to the real estate market rather than towards production activities, the

imbalance between savingsinvestments becomes even more worrying.

The deepening of the deficit during 2007 compared to the previous year and

against an international background characterized by volatile financial markets,

caused Romania to be sanctioned by certain rating agencies. The Fitch Agency

reduced the rating of Romania, at the beginning of 2008, reckoning that its

perspectives were heading towards the negative: The current account deficits of

Romania, Bulgaria and of the Baltic countries have deepened down to worrying

levels with respect to current standards or to the historical ones in the international

markets. The major arguments were that under the present conditions any attempt

at collecting the resources meant to cover such a deficit is more difficult. At the

same time, the unfavourable international background might cause significant

reductions of foreign capital inflows, while the domestic area could be inflicted by

expensive macroeconomic adjustments.

Given such a situation, we have below reviewed this subject in detail, without

claiming to have spotted all the causes generating the deficit, nor all the solutions

meant to decrease it. We have merely tried to see how the future progress of the

deficit will be influenced by the countrys accession to the EU, in certain points. The

study only refers to 2006 (in more detail) and 2007 (to a lesser extent, due to less

statistical information available at the end of April 2008), but it takes into

consideration the longer-term trends of reviewed phenomena.

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We intend to investigate three aspects enabling us to figure out an answer to the

question opening this paper: (1) the major causes of the deficit; (2) how the latter is

being covered, and (3) how sustainable the deficit would prove on both short and

medium term, upon the countrys accession to the EU.

The Causes Generating the Current Account Deficit

(1) The analysis of the structure of the balance of payments shows that the first

cause of this worrying level of the current account deficit is the continuously

increasing deficit of the trade balance. Such a deficit, valued, respectively, to

11.8 billion Euros in 2006 and to 21.5 billion Euros in 2007 (NBR 2007a, 2008),

was achieved due to the highly differentiated dynamics of the two commercial flows

(exports and imports). Although both flows had significant yearly growths, thedevelopment of each flow was quite distinct (see Table 1). As such, total exports

featured a yearly increase of 16.2% in 2006 and imports reached 25.1%, whereas in

2007, their distinct dynamics grew even more apart: the exports increased only by

13.7% but imports grew by 25%. The specialists are warning that the differential

dynamics between the two flows is likely to have increased during 2007 as a

consequence of modified ways of recording imports as well (implementation of the

general trade system for EU intra-Community trade).

According to other estimations of the analysts from The Financial Market

Review, the real growth rhythms of the two flows, considering the actual exchangerate of RON (Romanian currency) in 2006see later commentswould have been

11.7 and 26.5% respectively. Consequently the differential dynamics between the

two flows would have been much larger in 2006, too.

Upon a first review, the development is due to the fact that the significant

economic growth (of some 7%) was generated by a soaring domestic demand, on

the accounts of the investments and of the consumption. Both such trends triggered

the expansion of imports.

Table 1 Commercial exchanges of Romania in 2006 and 2007

Exports (FOB) Imports (CIF) Total

Millions

Euro

Annual growth,

in %, comparing

to previously year

Millions

Euro

Annual growth,

in %, comparing

to previously year

Millions

Euro

Annual growth,

in %, comparing

to previously year

Total

2006 25850.5 16.2 40745.8 25.1 66596.3 21.5

2007 29380.0 13.7 50880.0 25.0 80260.0 20.6

From whichEU

2006 17449.7 16.3 25486.7 25.9 42936.4 21.6

2007 21117.8 15.9 36151.4 29.1 57269.2 30.3

Source: The National Institute of Statistics of Romania

Is the Current Account Deficit a Problem for Romania? 501

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We shall detail these reviewed tendencies of developments on dynamics and

composition of Romanian exports and imports respectively, only at the level of

2006, due to the lack of detailed information related to 2007.

(a) As we were mentioning, exports evolved slower than imports during both

years of reference. Quite surprisingly, certain analysts do not rank the continuousappreciation of RON as the first cause, but rather the difficulties of exporters to

adapt to the requirements of external markets, firstly the European ones (the EU

represents the destination of 67.7% of Romanias total exports during 2006 and

of 72% during 2007, respectively). However, as we shall see later on, the real

appreciation of RON remains liable for the slower dynamics of exports compared to

that of imports, both in 2006 and in 2007. During this last year, the steep

appreciation in the middle of the year even urged some of the exporters to redirect

their products towards the domestic markets (Palangean2007a).

The in-depth analyses for 2006 show interesting bench marks from this point ofview. Thus, Romanias most important European partners are Germany and Italy

(with almost equal shares, summing up over 30% of total value), though it is well

known that exports to these countries are, mostly, the result of lohn-type operations

(outsourcing operations).

We then notice that the exports directed towards the East European countries

increased more rapidly than the total exports (a yearly increase of 18.6% in 2006,

compared to the 16.2% directed towards the UE). Still paradoxically, it seems that

exports towards the EU have partially compensated the costs generated by imports

from extra-community countries. While in 2006 this latter group of countriesrepresented a share of mere 33.8% of Romanias total foreign trade, the transactions

with them produced about 45% of that years total trade deficit. A first explanation

would be that the major deficit with the group of fuels was recorded with extra-

community countries.

It is also worth mentioning that the composition of exports shows a tendency

towards improvement. The exports of medium or high technology products have a

remarkable growth, while the share of products with smaller added value decreased

(at the level of 2006, the three groups were holding a proportion just about equal

within the total exports).

A closer analysis of the developments of both real and nominal exchange rates

indicates that, due to the disinflation, the RON had even an over-appreciation

tendency during 2006, an obvious fact which can only influence exports in a

negative manner. Thus, according to the information from NBR (The National Bank

of Romania), the real appreciation of the RON compared to the Euro was 12.4%,

while the nominal appreciation was only 7.2%. In relation to the American dollar,

the real appreciation of the RON was 25%, while the nominal appreciation was

19.4%. As such, some analysts believe that, actually, this over-appreciation shows

us the true trend of exports. According to these calculations, the exports have been

showing a permanent tendency to decrease their shares in the GDP from 32.1% in

2004 to 28.7% in 2005, and to 26.6% in 2006 (a phenomenon indicating a

significant loss of external competitiveness based on prices (Palangean2007b).

(b) According to official reports, 2006 marked the growth of imported capital goods,

especially those for industrial companies. At first sight, one might estimate that such a

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modification of the destination of imports favours the future economic growth. Capital

goods do support industrial development (possibly its related services) and by that, the

creation of high added value products. However, the list of imported goods does not

help us to differentiate between complementary imports and the imports of equipments

(in the case of the two most important groups of imported goods, namely machinery,instruments and electric equipments, and transportation vehicles and components).

Complementary imports serve for the manufacturing of certain products by foreign

companies which trade the largest share of their products on the domestic market,

while only a small portion of them is meant for the external markets. These imports do

support the economic growth indeed, by increasing the domestic offer and implicitly

by covering the domestic consumption. It would be more advantageous for the country

if such imports would support the creation of productions meant to be exported, and

which would later on contribute to the improvement of external incomes. For instance,

among the product groups having recorded major deficits during 2006, there can alsobe found the group of transportation vehicles and components (-2.165 billion Euros).

In that category of products there exists, potentially, the capability of exporting cars

into certain foreign markets. It is also true that one group of products featuring large

deficits (the second one) for 2006, was the group of fuels (-3.331 billion Euros,

representing about one-third of the total current account deficit). This import would

probably lead to significant deficits on long term, due to Romanias wide dependence

upon external resources.

(2) The second position in the balance of current accounts which produces major

deficits is the balance of incomes; it shows a deficit of 3.014 billion Euros in 2006and of 4.404 billion Euros in 2007, respectively.

A detailed review would allow us to see that the main cause of such a deficit in

2006 was represented by the profit returns out of FDI and by the interests from

banking deposits [-3.3 billion Euros ? (-0.6 billion Euros)] (NBR2007b). For an

FDI Romanian stock of about 30 billion Euros, the profit returns in 2006 reached

some 11% from the stock, while about one-third from the profits were reinvested,

according to the information provided by the NBR. According to the analysts,

remittances abroad with certain positions in the balance of the incomes have

increased exponentially during 2007 (Palangean 2008), which indicated a steady

tendency towards the continuous increase of its negative net amount1. One of the

arguments would be the fact of having recorded a triple increase of banking deposits

on medium term by non-residents in 2007.

Coverage of the Current Account Deficit

Two major resources have been contributing to the coverage of Romanias current

account deficit during its 2 years of peaks, namely 2006 and 2007: the net balance

of unilateral transfers (?4.794 billion Euros in 2006 and ?4.853 billion Euros in

2007) and the net balance of FDI flows (?9.082 billion Euros in 2006 and

?7.069 billion Euros in 2007) (NBR 2007b,2008).

1 The NBR has not yet edited the detailed structure of recordings with the balance of payments for 2007.


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Thus, the amounts transferred by Romanian people working abroad have been

growing continuously during the 2 years of the investigation, reaching 5.203 billion

Euros in 2006 and 7.160 billion Euros in 2007. The largest portion of these amounts

is unfortunately being used for consumption and not for productive investments. In

the short term, these amounts would indeed represent potential major leveragesmeant to stimulate the domestic production (still, it is not known to what extent the

consumers orient themselves towards imported products or towards products of

domestic production).

In recent years, the NBR officials have explained both the nominal appreciation

of RON and the sustainability of the current account deficit, by the high volume of

inflows of FDI and by their positive net balance. Thus, concerning 2006, the NBR

governor pointed out that the deficit was covered up to a proportion of over 90%, by

the net balance of FDI flows (Isarescu2007), while for 2007, the releases from the

NBR indicated a proportion of only 42% (Fig. 2in Appendix).However, for a fair analysis of the clear impact of FDI flows, certain aspects

would still have to be commented. Firstly, it is necessary to indicate that, at the

level of 2006, one-third of the inflows had actually been reinvested profits

according to the information provided by the NBR (Copaciu and Racaru 2006).

Secondly, the FDI stock generated in 2006, in its turn, major external payments

under the form of import payments and profit transfers (the latter reaching some

3.3 billion Euros in 2006). Due to the lack of certain data (the release of the

NBR at the beginning of 2008 only refers to the recordings on the main

positions of the balance of current accounts in 2007, with no related details) weassume that the tendencies noted in 2006 are quite likely to persist during 2007

as well.

Sustainability of a Large Deficit in Both the Short and Medium Terms

Debating on this topic would imply to argue about two more important aspects: (1)

what could the evolution of the factors generating the deficit be, upon Romanias

accession to the EU? and (2) how could the coverage resources of a potential deficit

develop?

(1) Before anything else, coming back to the causes, let us remember that the

main cause producing the current account deficit is the trade deficit. What could the

estimates related to it for the post-accession period be?

In relation to this deficit, two important aspects have been previously mentioned

by us. Firstly, there is quite a serious deficit with the group of fuels (-3.3 billion

Euros in 2006), and consequently, even after the accession, that deficit might

continue to be a source of external expenses for Romania, considering that the

supplying sources are outside the EU. However, it is likely that after the accession

there will be a significant decrease of energetic intensity specific to the production

in Romania. This trend may happen, on the one hand, following certain possible

technical and technological improvements applied by potential foreign investors in

Romanian industry, and, on the other hand, as an effect of increasing the service

activities at the expense of industrial ones.

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Related to that aspect, it is also worth remembering that almost half of the deficit

in 2006 originated in relation with countries outside the EU (obviously, including

the imports of fuels).

Would this deficit be likely to be reduced due to the relatively better situation of

trade performed with the EU (even though the EU was holding about 65% of thetotals in 2006, it was only generating some 55% of the deficit during that year)? In

order to make some estimates, we shall also have to relate to what happened to the

ex-communist countries having acceded to the EU in 2004. According to the studies

undertaken on that matter, most of the investigated countries have shown, within

their intra-Community trade, a trend towards an increase of their imports and,

implicitly, of their trade deficit2 with partner countries in the EU. Considering such

developments, it is very likely that Romania might feature a similar tendency

towards a large growth of the imports from the EU, also following a continuous

tendency towards a high economic growth, mainly on the grounds of its domesticconsumption. In other words, the future might be marked by an increased EU

contribution to the generation of trade deficit.

Regarding the general development tendency of exports in the near future, we are

to consider the following possible development.

Seen from the value point of view, their dynamics may be influenced by three main

factors: (a) the evolution of the RON exchange rate, (b) the modifications of the

dynamics of export productions and the structural modifications of exports, and (c)

modifications with the trade policy incurred upon the countrys accession to the EU.

(a) The evolution of the exchange rate is associated with several uncertainties(Anghel 2007), while analysts do not share a common view on the future of

such development3. What could the factors influencing the evolution be? To

begin with, the continuous appreciation of the RON is basically due to the

massive inflows of capital, with no obstacles at all since September 2006, with a

completely free capital account. It is estimated that, at least in the short term,

there shall continue to be important inflows of FDI, as is shown in the

experiences of other countries that acceded to the EU in 2004. Though the great

privatizations are almost concluded, the economic background of Romania is

likely to stay attractive under several aspects (reduced taxation of profits and ofincomesonly 16%, a better stability of the laws due to the undertaken acquis

of the Communities, improvement prospects of both physical and intangible

infrastructures by means of transfers from structural funds). Also, Romania

continues to stay attractive for banking deposits on the local currency and for

acquisitions of bonds meant for non-resident people. This is due to maintaining

differences of interests at high levels, compared to countries either in the EU or

in other regions. Though the NBR announced an inflation target for 2008

showing a continuous process of disinflation (3.8%), the appearance of newer

2 Estimates performed by The National Forecast Commission, 23 November, 2006.3 The most appropriate estimate seems to be that, upon its accession to the EU, Romania might also

exhibit tendencies similar to those of the countries having accessed in 2004: in some of those countries

the currencies have turned out to be highly volatile, as periods of self-appreciation were alternating with

periods of depreciation.


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inflationist pressures during 2007 (longer drought, increased global prices of

oil) has forced it to keep a high level of interest also for 2008 (up to now, by 9

10%). In Romanias case, besides the factors having acted in the other countries

as well, such inflationist tensions are also possible as an effect of cancelling the

administrative control of several prices. Consequently, it is likely that theinterest differential might persist (due to a restrictive monetary policy

controlling the inflation ratio), continuing to keep the deposits in RON

attractive, as well as the acquisition of bonds by foreign investors. By NBR

estimates, inflows of foreign speculative capitals shall be maintained at high

level and these will influence the exchange rate. The real exchange rate of RON

will be determined by the difference between the appreciation step of the

nominal exchange rate and the step proper to the disinflation. The nominal

appreciation might be partially eroded by a slower disinflation or even by a

slight increase of the inflation rate. Thus no over-appreciation of the realeffective exchange rate shall take place, at least on short term. The evolutions

since the beginning of 2008 indicate an increased volatility of RONs exchange

rate, still with an apparent tendency to stop the rhythm of appreciation.

(b) With respect to the dynamics and the composition of exports, certain

modifications are predictable, as we shall investigate below. First of all, the

exports of certain groups of products are likely to increase, especially of those

groups which were previously frequently confronted with trade barriers when

entering the EU (due to a free-trade area which was incomplete before the

accession to the EU). Such evolutions were recorded for the agricultural foodstuffs in the countries which had acceded to the EU in 2004. At the same time,

foreign investments are likely to grow in industrial branches manufacturing

products with higher processing degrees and with higher added value.

Although, until now, the objective of most FDI was that of penetrating

Romanias domestic market, it is our hope that the unrestricted access to the

Internal Market will stimulate foreign investors to manufacture products meant

for this market and for other external markets as well. However, certain older

member countries, as for instance Greece, had some negative experiences after

the accession period. Thus, deindustrialization phenomena may occur due to

the tendency which reorients both foreign and domestic investments towards

the field of services, though the latter are neither larger added value nor

tradeables (Bal 2003). Again, the countrys accession to the EU is likely to

determine a continuous reduction of lohn-type operations (mainly as an effect

of the tendency to increase wages), which will influence the second group of

exported products, in terms of value. This appreciation appears to be fully

grounded, if we were to consider that the reduction of lohn-exports turned true

in 2007, which specialists estimated as one of the important causes of the

generated trade deficit. International studies show the tendency of lohn-

operators to relocate their operations in countries such as China or India4. In

other words, the impact of the accession to the EU upon the dynamics of the

4 Nevertheless, in the case of Romania, foreign operators are allowed to bring in working men or women,

as it happened in the county of Bacau.

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exports stays uncertain, while it is the FDI which will primarily determine

their structural modifications.

(c) Apparently, the accession to the Internal Market and the compliance of

Romanias customs tariffs with those of the EU do primarily bring in

benefitseliminating those trade barriers still existing after acknowledging theimperfect free-trade area created on base of the Association Agreement. The

possibility of certain negative effects still exists, out of which some are to be

mentioned below. Thus, related to penetration into the Internal Market,

European studies have shown that many small and medium sized companies

will be facing many difficulties. Numberless non-tariff barriers are still

maintained. Technical, quality and environment barriers are the most difficult

to override due to the costs which they incur at the corporate level, for the sake

of compliance. It is not only the experiences of the recently acceded countries

to the EU that indicate such a probability, but also that of some older memberstates. For such a reason the Czech Republic, for instance, requested transitory

periods after the accession for this chapter of negotiation, having as references

the derogations previously allowed to Austria, Finland and Sweden (when they

acceded to the EU in 1995). Thus, certain studies performed by Spanish

specialists (Cueras1996) have shown that, on the Internal Market, the major

barriers which the Spanish producers were facing were perceived to be the

technical barriers (for 50% of the interviewed companies). The use of many

still existing technical barriers in the EU is being explained by phenomena

such as: small scale harmonization;

mutual lack of acknowledgement of approving and certification methods;

divergences over the implementation of community laws.

Such barriers have firstly an impact on the intra-European product exchanges like

electronic, textiles, foods and industrial equipment.

Referring to the second important cause producing the deficit, the balance of the

incomes, it is expected that the returns of profits and of interests would continue to

keep to a high level during the following period of time.

In addition to the main causes of 2006, the coming period might be marked by

the appearance of certain sources generating deficit, at other positions of the

payment balance.

As such, in 2006 the balance of services remained stable but recorded some

surplus during 2007; the evolution of its amount stays uncertain for the next period.

For instance, though Romania might increase its incomes generated from tour

operations, according to the comparative benefits provided by the richness of natural

factors, it is more likely that no particular improvement of services might occur in

that field in the short term. In addition to all these causes one more might be added,

namely the outflows of domestic capitals. Though the high interests for deposits and

the cheap labour force are still attractive factors for domestic capitals, it is not

unlikely that in the future, together with more relaxed interests and higher wages,

there might occur an increase of capital outflows. This evolution might cause the

reduction of the positive impact of the capital account and financial balance on the


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current account deficit. The tendency of increasing the Romanian direct investments

in the neighbouring countries of Romania was already noticed in 2007.

(2) A few remarks are worth mentioning with reference to the possible evolution

of the previously mentioned resources covering the deficit.

The massive inflows of FDI in 2006 were due to the significant achievedprivatizations (of the Romanian Commercial Bank, first of all). Since the great

privatizations have been almost concluded, it is more advisable for us to prudently

estimate that during the immediate future period there will no longer exist very large

yearly flows of FDI. Romania might increase its comparative advantages, such as:

an advantageous quality-price ratio of labor force (mainly through the improvement

of work productivity5, also by increasing the expertise and the skills of the labour

force), the improvement of both material and of intangible infrastructures, cutting

down bureaucracy and improving the efficiency of public administration and the

reduction of corruption. Thus it might become an attractive location for outside theUnion investors as well, since they would have access to the Internal Market.

Consequently, in the medium term, FDIs maximal net contribution can cover up to

a 60% of the current account deficit. After the results of 2007, such estimates seem

even too optimistic, since during the last year the FDI inflows only covered 42% of

the current account deficit (NBR 2008).

Romanias financial market is still an emerging one, in progress, and the

specialists note the existence of a tendency towards the increase of the efficiency of

stock exchange transactions (NBR2007c). Consequently, it is likely that the inflows

of portfolio investments might increase. They could become another resourcecovering the current account deficit.

As to the remittances of the Romanian people working abroad, it can be

estimated that they shall keep up to high levels, in the short term. But they might

decrease later on, as some of the Romanian workers will finally settle in their host

countries, while others might come back to the country (for instance, the Romanian

working on Spanish construction sites are currently affected by the crisis in the real

estate sector).

Nevertheless, the countrys accession to the EU also gives rise to a new resource

capable of covering the deficit, namely the transfers from structural and cohesion

funds to Romania, as a cohesion country, which shall be achieved starting from 2008.

Conclusions

From the above-mentioned statements, it can be seen that, while the causes that

produced the large deficits of 2006 and of 2007 show a tendency to persist even

upon Romanias accession to the EU, the previous coverage resources appear to

become more fragile. It seems more likely that the countrys accession to the EU, at

least in the short term, will even determine an increase of the trade deficit within the

intra-community relationships and, along that way, an increase of its contribution to

Romanias total trade deficit.

5 Romania holds at present the last but one position in the EU27 group, in terms of work productivity.

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Consequently, it can be said that the current account deficit is quite likely to

continue to persist at high levels during the immediate period of time. For this

reason it has to be a concern for the Romanian authorities, as a source of economic

and financial imbalance. Certainly for Romania the accession to the EU represents

an improvement of its worldwide image. This can provide easier access to theinternational financial markets to cover the current account deficit. Considering the

relatively low share in the GDP of the external public debt (12.8% in 2006 and some

20.5% in 2007 respectively, according to official estimates), such a solution is, for

the time being, far from becoming a burden. It is worth mentioning that the

Romanian companies have at present the tendency to increase their foreign financial

loans, especially short-term loans. Under such conditions, it would still be necessary

to supervise the current account deficit evolution since it represents, together with

other indicators, a warning signal related to the countrys possibility of becoming

vulnerable to a potential currency-financial crisis, either domestic or regional.As to the signal extraction model, the warning indicators, related to a potential

stemming up of such a crisis, are considered to be the following (Copaciu and

Racaru2006):

(a) the over-appreciation of the real effective exchange rate;

(b) the share of the current account deficit in the GDP;

(c) indicators of foreign debts;

(d) the share of non-governmental credits in the GDP;

(e) the share of portfolio investments in the GDP,

(f) the share of budget deficit in the GDP;(g) the growth rate of exportations.

Fortunately, Romania is currently vulnerable to only three of the indicators

above, namely (a), (b), and (g), but it is likely that others like (d) and (e) might

worsen (the restricted size of this paper does not allow us a more extensive

discussion). Nevertheless, monitoring the current account deficit and preventing it

from deepening would be a condition of maintaining Romanias macro-economic

and financial-monetary stability in both the medium and long term.

Appendix

Figures1and2.

Fig. 1 The deficit of current

account (% of GDP).

Source: NBR reports


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National Bank of Romania (2007b) The report on the financial stability during 2006. http://www.bnro.ro

National Bank of Romania (2007c) The report on the inflation, May 2007. http://www.bnro.ro

National Bank of Romania (2008) The press release of 14 February, 2008. http://www.bnro.ro

National Institute of Statistics (2007) Press release no. 23/2007, 9th February 2007.http://www.insse.ro/

National Institute of Statistics (2008) Press release no.31/2008, 11th February 2008.http://www.insse.ro/

Palangean DC (2007a) A mix for Romania. In: The financial market (Piata financiara), vol 11. pp 46

Pa

la

ngean DC (2007b) The economy closes itself!. In: The financial market (Piata financiara), vol 2.pp 2223

Palangean DC (2008) The guillotine of the deficit. In: The financial market (Piata financiara), vol 2. pp

46

Fig. 2 FDI, annual inflows (in

millions Euro). Source: NBR

reports

510 A. Bal

1 3
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romania's current account deficit

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