Most likely, Gideon Rahman, the chief foreign policy commentator of the Financial Times, is right: none of the states of the Middle East or the United States want a general war in the region, writes Radu Krachun in his personal blog.

The problems it will bring and the resources it will consume will be too great at a time when the war in Ukraine is already draining the US treasury, Iran’s economy is suffering from economic sanctions, and Israel’s economy has already been hit by mass mobilization. employees and expenses for military campaigns. And yet, the possibility of a generalized war in the Middle East cannot be completely ruled out.

Because, as a Washington insider quoted by Mr. Rahman said: “There is a red line for all the countries involved, crossing which will make them think they have to intervene. But no one knows what the other’s red line is.” Under such conditions, the risk of large-scale operations cannot be neglected. Especially since, as the FT columnist noted, no one wanted the First World War, but in the end everything got out of control. For this reason, I think it is worth showing our imagination and asking ourselves: what effect will a war in the Middle East have on Romania?

The immediate reaction will be the price of oil, which has seen significant increases throughout the region’s tumultuous history when major conflicts have erupted. The increase reached 20% in connection with the Iran-Iraq war, 50% in connection with the revolution in Iran or 100% in the context of the invasion of Kuwait. Likewise, the price of gas may suffer, given the export of LPG from the region. The culmination of such a conflict would be Iran’s attempt to block the Strait of Hormuz, thus preventing the transportation of a fifth of the world’s oil production.

Parenthetically, it should be said that in such a situation, the importance of Russia as a supplier of gas and oil will grow exponentially and, as a result, its negotiating power at the geopolitical table. Without a doubt, the explosion in oil and gas prices will spread to the Romanian economy in several directions. On the one hand, it will have an inflationary impact, given the multitude of products and services for which the price of hydrocarbons is of great importance, from heating homes to transportation costs.

Traditionally, the BNR has not attempted to respond immediately to supply-side inflationary shocks (such as VAT increases or gas price increases), preferring to wait to see to what extent inflation tends to persist even after the cause has been removed.

On the other hand, any plan to lower the base interest rate in 2024 will definitely be delayed until the inflationary context disappears. However, an inflationary situation will inevitably have a negative impact on consumption and investment in the economy, which can slow growth to the point of economic stagnation and even recession. This trend may be exacerbated by the recession of Romania’s main European trading partners, especially since even today they are at the bottom of economic growth.

Paradoxically, the recovery of inflation will have a positive effect on budget revenues, as 2022 showed. But this will not be enough to compensate for the negative impact of economic events and, above all, the increase in financing costs. Because, in addition to the shock through commercial channels, at least as strong a shock will come through financial market channels.

Such a crisis, this time geopolitical, would once again surprise Romania in a situation of financial vulnerability caused by an excessive budget deficit. Deja vu 2008. A war in the Middle East would spook investors around the world, forcing them to retreat into safe assets. And Romanian assets, unfortunately, are not among them.

If we look at the relatively high interest rates that investors are asking today to finance the Romanian state, they already seem to reflect some fears. The regional conflict will only exacerbate them and make financing the budget deficit prohibitive. It is also worth noting here that Romania’s rating is a ticking time bomb. It is already at the lower end of the category recommended for investment (investment grade), and increased budget financing costs together with a high deficit could push Romania into the category not recommended for investment (junk) in the absence of firm corrective measures. .

The temptation of safe assets will force a large part of foreign institutional investors to exit Romania by selling government securities or shares, which will lead to a decrease in their prices. At the same time, the net outflow of currency puts pressure on the exchange rate, forcing the BNR to stimulate the increase of interest rates on the interbank market according to the recipe already tested in the past through the policy of money market liquidity. This means that, even if the official interest rate of BNR remains unchanged, the de facto short-term interest rates practiced in the interbank market will be significantly higher, completely disconnected from what should be the “reference interest rate”.

Such a situation may lead to an increase in interest rates on deposits, but especially to an increase in variable interest rates on loans, even if only for a limited period. Under these conditions, it is possible that we will be forced, again after the 2008 scenario, to return to emergency financiers such as the IMF and the EU. Of course, the “lunch” will not be free, as it is accompanied by austerity measures aimed at controlling the excessive budget deficit.

These measures will include raising fees and taxes to raise revenue, as well as freezing or cutting certain government spending. And not only already known excesses. Such measures will only lead to a recession in the economy, which is already faced with a difficult international context. For decision-makers, the temptation to turn to outside institutions will be all the greater as responsibility for unpopular measures may be placed on international institutions in an election year.

Even so, the political implications should not be overlooked, as there is a risk that the austerity measures will fuel populist and extremist currents in Romania, which will be fueled by a wave of social tension. There is only one conclusion. Unfortunately, Romania is not ready to absorb the economic shock caused by the general conflict in the Middle East, access to external financing from the EU and ultimately the IMF is essential. But they will not be able to avoid recession and inflationary crisis.

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