In an article published last year on savings in Romania during the pandemic, we pointed out that despite all expectations, the savings held by Romanians, both in Romanian lei and in foreign currencies, had in fact increases. If the current situation is no different from that of a year ago, the savings and credit process would benefit from a closer examination. The main objective of a brief analysis would be to discover the main drivers that have led to surprisingly good macroeconomic development in the extremely difficult circumstances of the pandemic of the past two years.
Romania — Loans and deposits during the pandemic, 2020-2021
Source: own calculations based on data from the BNR and the National Institute of Statistics (INS)
*= estimate for 2021 by the National Commission for Strategy and Prognosis; Ex. Price = eop:.
As in many other countries on the planet, the pandemic is not yet over in Romania. 2021 has been a year of many ups and downs in terms of the pandemic. Romanian political authorities made a series of mistakes by declaring at the beginning of summer 2021 that the pandemic was over. Over the fall, results showed that was not true. Additionally, the National Liberal Party (NPL) organized a large congress with over 5,000 delegates for the internal elections in September 2021 where no consideration was given to protective measures for participants. Some of them did not even comply with the most basic requirement, namely wearing a mask. Thus, Romania is now struggling with what is called the fifth wave, while the proportion of people vaccinated remains very low (41% for double doses) compared to other developed countries or even countries in the region. Unfortunately, Romania ranks 10th in the world in terms of deaths per million inhabitants. The economy has suffered shock after shock, with the tourism and hospitality industry, aviation and the education system being the hardest hit.
Under these circumstances, the figures presented in the table above for 2021 seem somewhat surprising. The total volume of savings made by the population and other non-governmental entities increased by a respectable amount of RON 59.6 billion (EUR 12.0 billion). This number is just a bit higher than the increase in absolute terms when compared to 2020. Such an achievement is to be welcomed considering the turmoil of 2021. In a way, the increase savings in 2020 was a “forced increase”, as the level of restrictions was high. Malls have been closed until June 15, 2020, reducing the chances of consumers spending. Additionally, in 2020, the travel industry has been restricted both domestically and internationally. “Stay at home” restrictions were in place. However, the main driver of the strong increase in savings in 2020 could have been the so-called “unknown factor”. In these days of 2020, no one knew for sure whether the pandemic was a temporary situation or not. Recall the “great panic” of April 2020 (at the start of the pandemic) when depositors demanded their money from commercial banks, behaving irrationally. At that time, the price of Romanian government bonds temporarily jumped on the secondary market from 3.5% to nearly 6%.
Fortunately, common sense eventually prevailed. Vaccination began and Romanians, like all the others, began to learn to live with this terrible virus, the origins of which are still unknown today. However, more recently we found out that it was going to last for years and therefore the attitude of the people changed accordingly. Thus, the pace of savings has remained constant in 2021 similar to 2020. This trend is very likely to continue for the foreseeable future. An interesting feature is that demand deposits denominated in foreign currencies were higher in 2020 than the same type of deposits denominated in lei, a trend precisely caused by the pandemic. In 2021, this reversed when people’s fears of the “unknown” began to subside.
On the other hand, total borrowings started to recover in 2021 (+14%) after an almost flat year in 2020, with loans denominated in foreign currencies growing much more slowly than those in lei in both years. It is also a good signal that the economy has started to recover after the disastrous year 2020. The support provided to Romania by the European Union (EU) through the National Recovery and Resilience Plan (PNRR) also had a positive impact on total savings and loans. Currently, Romania has allocations of 29.2 billion euros under this plan and the litmus test for the country would be to succeed in absorbing these funds, both the free non-reimbursable funds (grants) of 14 .2 billion euros and loans of 14.9 billion euros as well. In this regard, it is too early to assess whether successful utilization will be achieved or not. The first part of the money arrived in the country and the first tranche of 1,851 million euros was placed in reserve with the National Bank of Romania (BNR).
Interest rates, which play a key role in the saving and lending process, represent a fine balancing act by the BNR. This was done correctly by the central bank, with the last adjustment being made in January 2022. The base rate was increased to 2.00% effective January 11. However, if the estimated inflation level of 7.90% for 2021 is taken into account, a finer adjustment is necessary, especially if the economies are to be stimulated further. Commercial banks should also act, since the interest granted for a one-year term deposit, for example, of around 2.0% for the lei and 0.01% for the euro is obviously much lower than the ‘inflation. In addition, the quality of services provided by commercial banks to the population should be increased. Fundamentally, saving over the past two years has not been favorable to depositors who have actually lost money in real terms.
Under these circumstances, Romania was inevitably forced to borrow more on international markets, despite good reserves. According to figures provided by the BNR, the level of international reserves reached 45.8 billion euros, of which the 103.6 tonnes of gold held by the country accounted for 5.4 billion euros. This seems to be the good side of the story and could be linked to the level of savings recorded by the country. If the level of international reserves is comfortable at this stage, one could raise the question of the costs of holding such reserves. The role of gold is undisputed, but it should be mentioned that it does not produce any income. On the contrary, holding gold is an expensive exercise. Also, keeping large amounts of reserves with foreign banks will not bring good rewards because the rates paid on deposits are currently very low. There are no adequate indications of the quantity of gold and international reserves that should be maintained at an optimal and profitable level. This is all the more necessary in the context of another much-appreciated action taken in August 2021 by the International Monetary Fund (IMF) to issue Special Drawing Rights (SDRs) for a total amount of SDR 650 billion. Of this total amount, Romania had an allocation of 1,736 million SDRs, or the equivalent of 2,100 million euros.
However, on the other hand, Romania’s foreign debt has increased considerably over the past two years. It reached 133.2 billion euros as of December 31, 2021, the highest level in the country’s history. The new SDR allocation mentioned above is now part of the country’s external debt. There is no clear strategy on how the external debt will be paid. Moreover, in 2021, a current account deficit of 15.3 billion euros was recorded (9.8 billion euros in 2020), which is yet another historical level. In addition to large trade deficits, the level of remittances has fluctuated over the past two years and this feature is likely to continue, with specific variations by country of origin due to the pandemic status in each case. particular.
It is true that many other countries have fought the pandemic through external borrowing, but in the case of Romania this practice is more risky because the absolute level of this indicator is higher than 55% of its GDP. An immediate strategy is needed and the BNR should be the main institution in charge of conducting this exercise, the final scope of which should be to control the increase in foreign currency debt. As part of this strategy, Romania should be selective in its foreign borrowings. Numerous analyzes published in 2021/early 2022 have clearly pointed out that Romania is paying a heavy price by borrowing in foreign currencies without a clear strategy. According to the European Central Bank, Romania’s average borrowing cost (for long-term government bonds in national currency) is higher than that of Poland, Hungary, the Czech Republic and Bulgaria, for n cite just a few. Romania can no longer afford it.
The year 2022 brought to Europe and more particularly to Romanians a very complex regional geopolitical context. Moreover, the pandemic crisis is not over yet. These two factors will show that the use of domestic savings will become very useful as the recovery of the Romanian economy is in full swing.
Alexandru M. Tănase, PhD, is a freelance writer and former associate director, senior banker at the EBRD and former adviser to the IMF. Mihai Radoi is a director of a specialist investment fund focused on Eastern Europe and former Executive Director of Anglo-Romanian Bank, London and previously of BFR Bank, Paris. These are personal opinions of the authors and not of institutions cited (including, but not limited to, those of the IMF, EBRD and NBR). The assessment and data are based on information available at the end of January 2022.