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On Friday, September 4, 2020, the exchange rate reached a new all-time high, showing the NBR (based on the buy and sell quotes of banks in the interbank foreign exchange market) an exchange rate of 4.8492 lei / euro.
The previous maximum level was on March 17, 4.8448 lei / euro, at the beginning of the coronavirus crisis and at the close of the economy.
Dan Suciu, communication director of the NBR, assures that this increase on Friday (0.1% compared to Thursday) is related to a regional context and the appreciation of the European currency at an international level (since the beginning of the year the euro has risen 5.3% against the dollar, a growth that is beginning to affect the European economy).
Beyond the explanations of the NBR, the problem is that this course, which brings together all the national and international economic activity of Romania, should have been at a much higher level, given: the trade deficit of 17 billion euros in 2019, 14 billion euros in 2018 and 8,800 million euros in the first 6 months of this year, increasing by 1,200 million euros compared to the 6 months of 2019; the balance of payments deficit of 10 billion euros in 2019, 8.9 billion euros in 2018 and 3.4 billion euros in the first half of 2020, and now the budget deficit is exploding, estimated at 92 billion lei (almost 20 billion billion) for this year, according to the latest budget correction; the explosion of the state public debt, which reached 430 billion lei in the middle of the year, up from 373 billion lei at the end of 2019, and last but not least, the increase in external debt, of which two thirds is private debt, at 111 billion in the middle of the year, 6 billion more than at the beginning of the year.
This time, the increase in the exchange rate would not have created major problems, as in the previous crisis, considering that the share of loans in lei is almost 70%, while in 2008 it was only 30% and 70% was in foreign currency.
Since the beginning of this year, the exchange rate has risen by only 1.46%, and since the crisis began on March 16, the exchange rate has risen only 0.6%.
The field has been and is too stable for these times, given the macro holes that increase from month to month.
The NBR says it does not encourage price increases to correct macroeconomic imbalances.
The problem is that the budget deficit, which has become Romania’s biggest macro problem, will not decrease so easily, and I doubt that a political government and a political coalition will agree to link its name to austerity and a budget cut ( the budget deficit must be reduced by at least half), given the Băsescu / Boc precedent, which in May 2010 increased VAT from 20% to 24% and reduced public sector wages by 25%.
The Orban / PNL government financed its budget deficit this year by paying higher interest rates than other countries, even if they are slightly lower than in the PSD government.
This interest rate differential (more than 3.5% for 5 and 10 year loans) compared to negative interest rates on euro loans keeps financing the budget deficit alive, even if the “guillotine” of increasing pensions and allowances hang quite heavily, especially in the eyes of rating agencies.
But when the time comes to introduce austerity measures – lower spending, higher income – it would be better not to raise the exchange rate in parallel, as has happened in the past.
If the same thing happens again, the economy, companies, people will be affected by difficult times.
In the previous crisis, the exchange rate rose in a few months from 3.6 lei / euro to 4.3 lei / euro and only stabilized with the loan of 20,000 million euros from the IMF, the World Bank and the European Commission, to which he added the agreement with international banks that have operations in Romania not to withdraw their financing lines.
So it would have been better to raise the rate now more, not just by 1.46% compared to 2.6% inflation, but perhaps by 3-5%. This increase would have been publicly justified by the economic crisis we are entering, caused by the coronavirus.
Ironically, this crisis allowed the NBR to reduce the monetary policy rate 3 times from March to early August, from 2.5% to 1.5%, which also led to the reduction of ROBOR from 3.2% to 1.99%.
The reduction of ROBOR was possible mainly due to the narrowing of the fluctuation corridor between the minimum interest rate in the NBR and the maximum interest rate. Now, the maximum interest rate on the NBR is 2%, and theoretically no bank would have to quote more on the market, because it can take money from the NBR. As a percentage, the NBR reduced the interest rate by no less than 30% and ROBOR decreased by 38%.
This reduction in interest rates at the NBR – 1.5% is the lowest level in the history of the National Bank – has been transferred more in loans related to ROBOR and less in interest on deposits made by banks. On average, the retail interest rate is 1.75%, but there are banks that also offer 3.5-3.75%.
Even if the interest rates on bank deposits, the population’s main form of saving, are extremely low, no money comes out of the banks, quite the opposite: the population’s deposits in lei reached 245.8 billion lei in July 2020, increasing by 12.7% compared to July 2019; the population’s foreign currency deposits in banks were 99.6 billion lei in July 2020, increasing by 16.5% compared to July 2019, and in real terms, taking into account the rate increase exchange rate of 2%, we had an increase of 14.5%, even when interest rates in euros are around 0-1%, at most.
Even if the Ministry of Finance offered an undeniable interest rate – 4% in 2-year lei, 4.5% in 4-year lei, and 2% in 5-year euro – in Fidelis’s operation of sale of government securities to the population the amount collected was only 2 billion lei.
For those of you who don’t know, Fidelis government securities listed on the stock exchange increased by more than 50% in three weeks, at least for 4-year lei securities (102.8 / 102.89 – Friday’s trading at the stock market), and by more than 50% for securities in euros (101.5 / 101.8 – Friday’s price on the Stock Exchange).
Romania’s economy and the business of almost 600,000 companies have performed better than initially expected in these six months of crisis, but a hot autumn will come, in which everyone will try to see where the future is heading. Also, as of January 1, when the moratorium on the suspension of payment of bank fees for individuals and companies expires, everyone will have a clearer and more realistic picture.
I don’t know what the NBR will do with the exchange rate (analysts see that it exceeds 4.9 lei per euro), but I think it should be higher, at another all-time high, so as not to create additional pressure when the crisis hits. budget, with the need to cut expenses and increase income.
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