Danske Bank: Romania's economy in the "red area"

Publish date: 19-11-2007
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The main issues are imbalances, induced by an unsustainable economic growth pace, which entails overheating, according to the bank's survey.

Romania has entered a slippery area as to its economy, being in the "red area", according to Danske Bank analysts, cited by The Money Channel. They indicate that Romania drops at seven, out of the 11, tests used by the Danish bank in order to appraise the status of economies in ten countries of Central and Eastern Europe.

The main issues in case of Romania are imbalances, entailed by an unsustainable economic growth rate, entailing overheating, according to Danske Bank survey. Other alarming factors are high inflation, high current account deficit, an over-evaluated currency, a too high lending pace, foreign balance in strong deficit and a too low monetary policy interest.

Assets: low budgetary deficit, high foreign currency reserves

Romania matches the normal parameters only in three situations, which are: low share of governmental lending within gross domestic product, sufficiently high foreign currency reserves and low budgetary deficit.

Similar situations to Romania are shared by Bulgaria, Lithuania, Latvia and Estonia. Danske Bank affirms about these states that they were on the edge of emergency landing in case of their economy, which may lead to financial deadlock. The Danish bank placed these states into the "red" zone, an area with the highest risk degree.

Regarding economic growth, the first appraisal criterion, the institution sees overheating also in the future, for several states, Romania included. These risks are brought along by "deepened current account deficits, an increasing inflation and pressures coming from salary raises". The states that are positioned by Danske into the "red" area, with the highest risk degree, Romania included, "registered, over the past year, salary raises of more than 10 per cent".

"A too fast growth may end dramatically at any time, through sudden cease of the advance and potential financial issues", according to the survey of the Danish bank.

Regarding the lending growth rate, Danske warns that "the advance in the Baltic States and Romania is hardly justifiable based on the main economic criteria". Related to the interest rates, Romania has more to do. "The rates of real negative interests (interests lower than the inflation rate - editor note) are not sustainable on long term. Their advance may take place through slowing down inflation or by increasing nominal interest rates, both measures being able to slow down the economic advance", according to Danske Bank experts.

In terms of the ratio of foreign currency reserves and imports, Romania and Bulgaria are the only states in the region which are "in a safe zone". This criterion is more relevant for the states having a pegged exchange rate (monetary board), such as Bulgaria or Baltic Countries, than for those with a floating exchange rate, such as Romania, Hungary or Poland, according to Danske analysts.

From among the countries where imbalances are too high - Romania, Bulgaria, Baltic Countries and Slovakia more recently - Danske Bank analysts recommend the investors who have or who intend to invest here to protect from risks by means of hedging.

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