At the beginning of this year, Romania received a dollar loan on the international capital market with an interest rate of 7.67%. The issue price is higher than the one received by Hungary for a similar loan just the day before. Simply put, this would mean that in the eyes of investors, the neighboring country looks less risky, even if the difference in interest rates is not very large. I wonder why?

The picture of macro indicators is not better for Hungarians. If we are close in terms of budget deficit, Hungary’s public debt is higher, inflation and domestic interest rates are higher. Moreover, the PNRR of Hungary is 5 times lower than that of Romania (well, here we are talking about a potential takeover, but the security system is categorically different in favor of our country).

And last but not least: the “black sheep” position of the Budapest government in the EU is well known, not only due to illiberal or anti-market measures, but also from the point of view of a defensive foreign policy against an aggressor from the east. Let’s also remember the recent scandal with the possible large-scale loss of European funds due to corruption? If all current data, as well as short- and medium-term forecasts for economic growth, are in our favor in comparison, then the explanation must be sought in the past.

For the last (many) years, we have bad statistics from rating agencies.

As we showed in the previous opinion, economic policy is too much driven by the election cycle, let alone 90 percent. This sinful characteristic of boom-bust, the failure to maintain fundamental macroeconomic balances or their brutal correction, usually only under the auspices of institutional credit mechanisms, is deeply rooted. In our country, economic growth, which is significantly higher than the average for the European Union, almost never leads to profits at the level important for rating agencies/investors.

Here we are talking about the deficit, about the public debt, that is, exactly why we are forced to borrow, and here we do it on unfavorable terms with rates characteristic of the junk category, even if we are not there.

Fiscal and revenue policies have been and remain largely focused on consumption and social protection, and this has also led to economic growth, but what if this growth was also accompanied by a reduction in public debt, for example? Probably, this would be noticed in the rating of the country, which would not be balancing on the edge of the abyss.

What distinguishes us, for example, from Hungary, as well as from other countries in the region with which we can compare?

The history of deficits and, above all, the current account deficit. These states, which we call metaphorically like others much more developed (how many times have you heard in recent years how we reached the top of European economic growth quarterly or annually), had the wisdom not to cause fatal damage to their deficits, the ones that matter most in relations between the creditor and the debtor and which determines the level of interest.

In short, while we were at the top of the EU for years in terms of current account deficit in relation to GDP, we were in the leading position for years in a row, Hungary even registered a surplus, and everyone else, even everyone, reduced their deficits, we came out to prove their swelling . Does anyone think that such a trajectory can be ignored because at some point the picture looks more acceptable?

The main vulnerability from the point of view of financial stability of Romania lies in the deficit of the current account of the balance of payments, more precisely in the constantly faster growth rate of imports compared to exports. This fact is a mathematical consequence of fiscal and revenue policies that have promoted consumption at the expense of public investment, leaving the domestic economy unable to meet excessively and often unnecessarily stimulated demand. You need goods and services that you don’t have enough of, and you import them. These are small things.

The problem is that this indifference to the quality of economic growth is self-defeating. Today, Romania faces twin deficits, an excessive budget deficit and a current account deficit, which stimulate each other in a dangerous spiral. Moreover, if before the beginning of the conflict in Ukraine, due to low interest rates and deflation, the growth of imports was “benign”, today the sinful model of growth based on consumption forces us to import inflation from the outside. Which comes above our inflation to preserve our national pride.

Hence, the current account deficit. This is a problem that we cannot hide either from the eyes of creditors or from the analysts of rating agencies, and in vain we demonstrate to them, every hour, every second, economic growth and excellent prospects. You have a deficit that has jumped from fixed without fixing it, interest remains high, rating is bad, confidence is low.

How do we get out of a double quote from a credit bureau of rating agencies?

The reduction in inflation that is going to happen, the foreign exchange reserves from the NBR, which have increased impressively by over 14%, the 30 billion from the European Union, I don’t think will impress the rating agencies. The public debt is also not relatively low relative to GDP, which, unfortunately, instead of conservation, was and is being seen by politicians as an opportunity to continue borrowing in order to promise higher pensions and salaries.

This misconception that debt is low and economic growth is high has otherwise led to the loss of all Maastricht criteria. The current account deficit must be reduced, and this must be a clear, programmed and visible evolution, not just a statistical accident. Otherwise, what the state won’t fix, the market will fix, and the pain caused will be much greater than the disappointment that countries like Hungary are better seen in the eyes of creditors and damned rating agencies.

If the current account deficit and its growth are caused by the economy’s inability to meet domestic demand, and this is clearly the case, then a corresponding adjustment is necessary. First of all, the state budget, fiscal and revenue policy should stop promoting imports. This is very difficult to achieve as long as the spending structure is dominated by 95% salaries and pensions, and revenues are tainted by dozens of electoral exemptions.

The latter must be eliminated, the indexation must be lower than the inflation rate, and, in general, it is necessary that the fiscal policy behaves as if we are under a stand-by agreement with the International Monetary Fund, if we really want to avoid this. It is necessary to stimulate exports.

PNRR’s €30 billion is a stork’s nest gifted by COVID. The EU gives us, but does not put us in trouble. Last but not least, and this is the most difficult, the internal debate must be changed, the continuous whining, focused on the illusion that the state has and gives from it, rather than redistributes, necessary financial education at least at the basic level. And then we will borrow cheaper than Hungary. Guaranteed.

N. ed. Daniel Oanza is an expert of the National Bank of Romania. His opinion does not reflect the official position of the institutions with which he is connected