SOUTH EAST EUROPEAN I SSUES

Is the Current Account Decit 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 decit of Romania, both signicant in size and
persistent, has been a worrying issue affecting the countrys economic and nancial
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 nal part deals with the potential developments of said
parameters during the post European Union accession period, as well as of their
respective inuential factors.
Keywords Current account decit Commercial decit
Currency overappreciation Foreign direct investment Accesion to EU
JEL Classication F32 G38 P33
Introduction
Is the current account decit to be perceived as a critical problem of Romania? How
will the countrys accession to the EU inuence the evolution of such imbalance
during the years to come?
The current account decit 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 rst glance, the concern related to the current account decit might seem
to 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: anabal@rdslink.ro
1 3
Transit Stud Rev (2008) 15:499510
DOI 10.1007/s11300-008-0024-3
economy, when the domestic savings do not cover the expenses (investments), the
economy could nd the resources necessary to nance the difference abroad, either in
the international nancial markets or by attracting foreign portfolios or direct
investments (Krugman and Obstfeld 2006). Even if, in theory, such an assessment is
a correct one, in reality, continuing to consume more than ones own incomes would
have 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 decits up to a certain proportion (of the GDP), might
have an impact on the countrys nancial 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 nancial markets, a large decit of current account would become an
imbalance difcult to cope with not only in the long term, but even in the short term.
Romania is an open economysince September 2006 its capital ows are totally
free, while its total foreign trade has exceeded 75% of GDP (Isarescu 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 decit 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 reected in the current
account decitwhile a deep decreasing of its savings ratio triggers up the problem
of just how sustainable the nancing of investments from external savings proves to
be (capital inows). 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 decit during 2007 compared to the previous year and
against an international background characterized by volatile nancial 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 decits 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 decit is more difcult. At the
same time, the unfavourable international background might cause signicant
reductions of foreign capital inows, while the domestic area could be inicted 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 decit, nor all the solutions
meant to decrease it. We have merely tried to see how the future progress of the
decit will be inuenced 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.
500 A. Bal
1 3
We intend to investigate three aspects enabling us to gure out an answer to the
question opening this paper: (1) the major causes of the decit; (2) how the latter is
being covered, and (3) how sustainable the decit would prove on both short and
medium term, upon the countrys accession to the EU.
The Causes Generating the Current Account Decit
(1) The analysis of the structure of the balance of payments shows that the rst
cause of this worrying level of the current account decit is the continuously
increasing decit of the trade balance. Such a decit, 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 ows
(exports and imports). Although both ows had signicant yearly growths, the
development of each ow 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 ows is likely to have increased during 2007 as a
consequence of modied 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 ows, considering the actual exchange
rate of RON (Romanian currency) in 2006see later commentswould have been
11.7 and 26.5% respectively. Consequently the differential dynamics between the
two ows would have been much larger in 2006, too.
Upon a rst review, the development is due to the fact that the signicant
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 which
EU
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 Decit a Problem for Romania? 501
1 3
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 continuous
appreciation of RON as the rst cause, but rather the difculties of exporters to
adapt to the requirements of external markets, rstly 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 (Palangean 2007a).
The in-depth analyses for 2006 show interesting bench marks from this point of
view. 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 countries
represented a share of mere 33.8% of Romanias total foreign trade, the transactions
with them produced about 45% of that years total trade decit. A rst explanation
would be that the major decit 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 disination, the RON had even an over-appreciation
tendency during 2006, an obvious fact which can only inuence 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
signicant loss of external competitiveness based on prices (Palangean 2007b).
(b) According to ofcial reports, 2006 marked the growth of imported capital goods,
especially those for industrial companies. At rst sight, one might estimate that such a
502 A. Bal
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modication 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 decits during 2006, there can also
be 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
decits (the second one) for 2006, was the group of fuels (-3.331 billion Euros,
representing about one-third of the total current account decit). This import would
probably lead to signicant decits on long term, due to Romanias wide dependence
upon external resources.
(2) The second position in the balance of current accounts which produces major
decits is the balance of incomes; it shows a decit of 3.014 billion Euros in 2006
and of 4.404 billion Euros in 2007, respectively.
A detailed review would allow us to see that the main cause of such a decit in
2006 was represented by the prot returns out of FDI and by the interests from
banking deposits [-3.3 billion Euros ? (-0.6 billion Euros)] (NBR 2007b). For an
FDI Romanian stock of about 30 billion Euros, the prot returns in 2006 reached
some 11% from the stock, while about one-third from the prots 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 amount
1
. 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 Decit
Two major resources have been contributing to the coverage of Romanias current
account decit 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 ows (?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.
Is the Current Account Decit a Problem for Romania? 503
1 3
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 leverages
meant 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 ofcials have explained both the nominal appreciation
of RON and the sustainability of the current account decit, by the high volume of
inows of FDI and by their positive net balance. Thus, concerning 2006, the NBR
governor pointed out that the decit was covered up to a proportion of over 90%, by
the net balance of FDI ows (Isarescu 2007), while for 2007, the releases from the
NBR indicated a proportion of only 42% (Fig. 2 in Appendix).
However, for a fair analysis of the clear impact of FDI ows, certain aspects
would still have to be commented. Firstly, it is necessary to indicate that, at the
level of 2006, one-third of the inows had actually been reinvested prots
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 prot 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) we
assume that the tendencies noted in 2006 are quite likely to persist during 2007
as well.
Sustainability of a Large Decit 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 decit be, upon Romanias
accession to the EU? and (2) how could the coverage resources of a potential decit
develop?
(1) Before anything else, coming back to the causes, let us remember that the
main cause producing the current account decit is the trade decit. What could the
estimates related to it for the post-accession period be?
In relation to this decit, two important aspects have been previously mentioned
by us. Firstly, there is quite a serious decit with the group of fuels (-3.3 billion
Euros in 2006), and consequently, even after the accession, that decit 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 signicant decrease of energetic intensity specic 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.
504 A. Bal
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Related to that aspect, it is also worth remembering that almost half of the decit
in 2006 originated in relation with countries outside the EU (obviously, including
the imports of fuels).
Would this decit 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 the
totals in 2006, it was only generating some 55% of the decit 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 decit
2
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 domestic
consumption. In other words, the future might be marked by an increased EU
contribution to the generation of trade decit.
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 inuenced by three main
factors: (a) the evolution of the RON exchange rate, (b) the modications of the
dynamics of export productions and the structural modications of exports, and (c)
modications 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 development
3
. What could the factors inuencing the evolution be? To
begin with, the continuous appreciation of the RON is basically due to the
massive inows 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 inows 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 prots and of
incomesonly 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 ination target for 2008
showing a continuous process of disination (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.
Is the Current Account Decit a Problem for Romania? 505
1 3
inationist 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 inationist tensions are also possible as an effect of cancelling the
administrative control of several prices. Consequently, it is likely that the
interest differential might persist (due to a restrictive monetary policy
controlling the ination ratio), continuing to keep the deposits in RON
attractive, as well as the acquisition of bonds by foreign investors. By NBR
estimates, inows of foreign speculative capitals shall be maintained at high
level and these will inuence 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 disination. The nominal
appreciation might be partially eroded by a slower disination or even by a
slight increase of the ination rate. Thus no over-appreciation of the real
effective 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
modications 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 food
stuffs 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 eld 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 inuence 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 decit. International studies show the tendency of lohn-
operators to relocate their operations in countries such as China or India
4
. 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.
506 A. Bal
1 3
exports stays uncertain, while it is the FDI which will primarily determine
their structural modications.
(c) Apparently, the accession to the Internal Market and the compliance of
Romanias customs tariffs with those of the EU do primarily bring in
benetseliminating those trade barriers still existing after acknowledging the
imperfect 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 difculties. Numberless non-tariff barriers are still
maintained. Technical, quality and environment barriers are the most difcult
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 member
states. 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 (Cueras 1996) 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 certication methods;
divergences over the implementation of community laws.
Such barriers have rstly an impact on the intra-European product exchanges like
electronic, textiles, foods and industrial equipment.
Referring to the second important cause producing the decit, the balance of the
incomes, it is expected that the returns of prots 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 decit, 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 benets provided by the richness of natural
factors, it is more likely that no particular improvement of services might occur in
that eld in the short term. In addition to all these causes one more might be added,
namely the outows 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 outows. This evolution might cause the
reduction of the positive impact of the capital account and nancial balance on the
Is the Current Account Decit a Problem for Romania? 507
1 3
current account decit. 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 decit.
The massive inows of FDI in 2006 were due to the signicant achieved
privatizations (of the Romanian Commercial Bank, rst 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 ows of FDI. Romania might increase its comparative advantages, such as:
an advantageous quality-price ratio of labor force (mainly through the improvement
of work productivity
5
, 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 efciency of public administration and the
reduction of corruption. Thus it might become an attractive location for outside the
Union 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 decit. After the results of 2007, such estimates seem
even too optimistic, since during the last year the FDI inows only covered 42% of
the current account decit (NBR 2008).
Romanias nancial market is still an emerging one, in progress, and the
specialists note the existence of a tendency towards the increase of the efciency of
stock exchange transactions (NBR 2007c). Consequently, it is likely that the inows
of portfolio investments might increase. They could become another resource
covering the current account decit.
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 nally 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 decit, 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 decits 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 decit within the
intra-community relationships and, along that way, an increase of its contribution to
Romanias total trade decit.
5
Romania holds at present the last but one position in the EU27 group, in terms of work productivity.
508 A. Bal
1 3
Consequently, it can be said that the current account decit 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 nancial imbalance. Certainly for Romania the accession to the EU represents
an improvement of its worldwide image. This can provide easier access to the
international nancial markets to cover the current account decit. 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 ofcial 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 nancial
loans, especially short-term loans. Under such conditions, it would still be necessary
to supervise the current account decit evolution since it represents, together with
other indicators, a warning signal related to the countrys possibility of becoming
vulnerable to a potential currency-nancial 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
Racaru 2006):
(a) the over-appreciation of the real effective exchange rate;
(b) the share of the current account decit 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 decit 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 decit and preventing it
from deepening would be a condition of maintaining Romanias macro-economic
and nancial-monetary stability in both the medium and long term.
Appendix
Figures 1 and 2.
Fig. 1 The decit of current
account (% of GDP).
Source: NBR reports
Is the Current Account Decit a Problem for Romania? 509
1 3
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Fig. 2 FDI, annual inows (in
millions Euro). Source: NBR
reports
510 A. Bal
1 3