By Andreea Gudin
In a concerning economic development, Romania concluded 2023 with the highest average interest rate on long-term external loans, a position previously held by Hungary in the preceding months. Despite the December interest rate of 6.19%, the second-lowest for Romania in 2023, the country’s overall performance in securing affordable loans has been marred by a lack of confidence from foreign investors.
Doubts Linger Despite Economic Growth
Investors seem wary despite Romania’s economic growth, doubting its sustainability. The risks to the Romanian economy, stemming from an excessive deficit and exacerbated by upcoming elections, are causing concern. The ruling parties, eager for votes, may succumb to the temptation of promising electoral gifts, further straining the economic situation.
Government Loans Exceed Expectations
In 2023, the government aimed for total loans of 160 billion lei (over 32 billion euros), with approximately 92 billion lei (almost 18 billion euros) dedicated to refinancing maturing government debts. However, the actual loans under the administrations of Ciucă and Ciolacu exceeded expectations, reaching 203 billion lei (about 41 billion euros). Marcel Ciolacu, acknowledging the debt burden in February of the previous year, warned of potential budgetary challenges, but the government refrained from making budget adjustments towards the end of the year, leading to an increase in expenses.
Challenges for the Current Year
For the current year, the government plans to borrow 181 billion lei (around 36 billion euros) to cover an estimated budget deficit of over 17 billion euros and roll over existing debt, amounting to an additional 19 billion euros. The government anticipates obtaining approximately 23 billion euros from local banks and the public, with the remaining 13 billion euros sourced from international markets. Notably, interest expenses are projected to rise to 34.83 billion lei.
High Borrowing Costs Explained
Romania faces high borrowing costs due to elevated levels of public debt, high inflation, and the repayment structure of its loans. In December, Romania had the highest interest rate in the European Union, a position shared with Hungary throughout the year. The reasons behind this punitive lending environment include our high public debt, elevated inflation, and the terms of loan repayment.
Potential Tax Increases and Fiscal Imbalances
While the impact on Romanian pockets remains minimal for now, concerns arise about potential tax increases after the 2024 elections. Discussions about tax reforms, including differentiated rates based on income and property tax hikes, are already circulating, with speculations of substantial increases beyond inflation rates.
Despite economic growth in recent years, Romania’s fiscal imbalances persist, and budgetary austerity measures seem increasingly challenging to implement. With an anticipated increase in expenses by 48 billion lei compared to 2023 and optimistic revenue estimates, the possibility of reducing the budget deficit appears slim.
Investor Impatience and Urgent Interventions
Some analysts even project a potential increase in the deficit to 6% of the GDP, up from the 5.7% recorded in 2023, keeping Romania in the excessive deficit procedure and further jeopardizing its chances of meeting the 3% target outlined in the Maastricht Treaty for Eurozone accession. Investors are becoming increasingly impatient with Romania’s economic challenges, signaling a need for urgent and strategic interventions to restore confidence in the country’s financial stability.
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