Chasing Rainbows - Questionable fiscal improvements

Noiembrie 2010

NICOLAIE ALEXANDRU-CHIDESCIUC - Chief Economist VLAD MUSCALU - Economist ING BANK N.V. AMSTERDAM - BUCHAREST BRANCH

 

Chasing rainbows

• At the moment, everybody is talking about "currency wars" and about how local currencies in some countries are depreciated or their appreciation is being prevented, aiming to gain export competitiveness and, thus, growth.

• In our view, the economic recovery in Romania may not be achieved through RON depreciation (with the aim of boosting exports) even though the link between exports and the exchange rate is present and is quite significant.

• A permanent and sharp local currency weakening would be needed for a significant increase in exports.

• The impact on growth coming from exports would be limited (due to the low share of exports to GDP).

• A 10% permanent real RON depreciation (roughly equivalent to RON5/EUR and no RON appreciation afterwards) would lift exports by 4%, providing a 1 ppt increase in real GDP.

• RON depreciation may have a negative impact on other variables (i.e. private consumption); thus, instead of fostering GDP, it could actually bring on a contraction.

• RON weakening may have to be accepted only to keep interest rates at a reduced level, thus offering support to both investment and private consumption.

• Exchange rate weakening does not lead to productivity increases and it improves competitiveness only temporarily. Therefore, aiming for a medium-term positive impact on exports would require a policy of continued and permanent RON depreciation.

1

2

3

4

5

6

The tricky lag LUCIAN CROITORU Adviser to the Governor - BANCA NAŢIONALĂ A ROMÂNIEI Lucian Croitoru, Adviser on monetary policy issues to the National Bank of Romania Governor, talks about the NBR’s next moves and explains why the decrease ofthe policy rate hasn’t been reflected into lower interest rates on bank loans. mai mult... The turnaround CRISTIAN SPORIS Secretar de Stat - MINISTERUL ECONOMIEI ŞI FINANŢELOR Cristian Sporis, Secretary of State at the Ministry of Public Finance, in charge with the national treasury and public debt, explains how the state managed to borrow money at the lowest costs in the last seven years and how it turned from a clear market taker into a player with a strong position on the market. mai mult...