The Impact of the Greek Crisis on Romania
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Iulie 2010 |
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JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
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JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
How exposed is Romania?
The Greek crisis may affect the Romanian economy in a variety of ways, and the risks are likely to last for some time. There is a risk of financial contagion. There will be some adverse impact on trade, foreign direct investment (FDI) and workers' remittances. Above all, the crisis could spill over through the Greek banks that are heavily involved in Romania and the wider region.
Greece has received a rescue package from other member states of the euro area to tide it over the short term – in particular, so that it can meet its immediate debt – servicing requirements. In exchange, Greece has to implement draconian austerity measures that will depress economic activity for years to come. In 2010 Greek real GDP is forecast to decline by 5%, and there are downside risks of even worse outcomes, which would magnify the various risks for Romania.
Vulnerability to financial contagion
The Greek crisis increases the chances that investors will focus on the vulnerabilities in the region's economies, and there is some risk of financial contagion from the crisis – for Romania in particular. There are some similarities between Greece and Romania and the other former communist Balkan economies, although the differences are also great. Widespread corruption, large informal economies and tax avoidance characterise to a greater or lesser extent all economies in the region. There are common problems with pension systems, including declining and ageing populations, and low birth rates. In terms of recent economic policies, Romania pursued pro-cyclical macroeconomic policies before the crisis struck. The country experienced a rapid expansion of consumer credit from a low base. Related to this, a large current-account deficit opened up.
There are, however, considerable differences between Greece and Romania. Romania has its own currency and a flexible exchange rate, so that it can adjust more easily. Romania’s fiscal problems are serious but nowhere near as acute as in Greece, since it had a budget deficit equivalent to 7.4% of GDP in 2009, compared with 13.6% for Greece. Romania’s public debt is equivalent to 21% of GDP, compared with some 120% in Greece. In addition, Romania’s current-account deficit has come down sharply, from 12.1% of GDP in 2008 to 4.4% of GDP in 2009.
Impact on the real sector
The direct impact of the crisis on the real sector in Romania is unlikely to be large. The importance of Greece as a trading partner for Romania is small. Only 1.9% of Romania's exports were directed to Greece in 2009, and imports from Greece accounted for just 1.5% of total imports in that year.
Romania is more vulnerable to a negative spillover through reduced FDI flows. According to FDI data from the National Bank of Romania (NBR, the central bank), Greece is the sixth-largest foreign investor in Romania (Italy dislodged Greece from fifth position in 2008; 2009 data are not yet a
Up to the end of 2008 the stock of Greek-owned FDI accounted for 6.5% of GDP. Furthermore, the penetration of Greek capital is higher than official figures suggest, because many Greek-owned companies are registered in other countries. If the NBR's statistics were to include Greek investment coming to Romania from Cyprus and other countries, Greece would probably be the fourth largest investor.
Greek investors are active in Romania largely in the banking, telecoms, trade and food-processing sectors. Apart from the major players such as Banca Romaneasca, Piraeus Bank and Alpha Bank, telecoms operators OTE, Cosmote and Germanos group and retailers such as Elmer Sports, many smaller investors are also involved in small - and medium-sized enterprises (SMEs) in the Romanian market. At the end of 2009, there were 4,697 registered companies with majority, capital from Greece, compared with 4,484 at the end of 2008. Although Greek FDI flows to Romania appear to have been sustained in 2009, the chances for any increase in Greek FDI flows to the region any time soon are slim.
Banking sector risks
Greek bank subsidiaries operating in Romania. There is a risk that Greek banks will reduce their exposure as a result of funding and liquidity pressures on the Greek parents. Greek banks account for about 22% of Romanian banking. The four largest Greek banks in Romania have participated in the exposure and capital commitments of the Bank Co-ordination Initiative. These banks are well capitalised and tightly supervised.
However, the risk of capital outflows cannot be discounted, nor the possibility that the Greek crisis will affect confidence in neighbouring markets. The recent downgrading of the ratings of nine Greek banks by Moody’s credit-rating agency – among them, the National Bank of Greece and Alpha Bank which are active in Romania – increased concerns about the possible impact of the crisis on their Romanian subsidiaries.
Greek-owned banks operating in Romania have committed to maintain levels of liquidity and prudential indicators at domestically prescribed levels. Nevertheless, fears are palpable that the cash-strapped parent banks of Greek subsidiaries in Romania may reduce their exposure, limit lending and drain cash from foreign branches.
