Balance of payments deficit up to €10.22 bln in 8 months

A crucial element influencing the current account balance was the €10.86 bln balance of trade deficit, up 69 percent compared to the January-August 2006 period, according to a National Bank of Romania (BNR) press release. Because of the sharp current account deterioration in the first eight months in 2007, financial analysts are skeptical about a 14 percent ratio of gross domestic product (GDP), anticipating a €16.5 bln deficit for 2007.

“The current account deficit must suffer a correction, but this will happen in a few years. It must be carefully corrected, with a realizable soft landing goal in view, not a radical one of bringing the external deficit to a manageable level,” BNR’s Governor, Mugur Isarescu, said yesterday. The BNR official explained that a current account deficit of 14 percent of GDP for this year would be high and would exceed previous BNR forecasts of an 11-12 percent share of GDP. “In the context of a potential €16.5 bln level by year-end, the deficit is unsustainable. There is a risk for the economy, since fiscal and income policy are expansionist,” Raiffeisen Bank’s Chief Macroeconomic Researcher, Ionut Dumitru, told Business Standard.

ABN Amro’s Analyst, Radu Craciun, calculates a 14 percent share of GDP, while Aurelian Dochia, a consultant with Concept economic and business consultancy company, forecasts an optimistic 13 percent share.

The deficit coverage capacity through foreign investment is quite low. Analysts forecast a maximum 50 percent coverage, compared to last year’s 91 percent. Foreign direct investments (FDI) amounting to €4.05 bln (down 6.3 percent compared to January-August 2006) covered 40 percent of the deficit in the first eight months of 2007. The Romanian Agency for Foreign Investments (ARIS) estimated €7 bln in FDI for 2007, compared to €9.1 bln registered in 2006.

Raiffeisen’s analyst sees major risks in terms of covering the deficit, since Romania depends on external financing and faces increased vulnerability in the context of the international crisis. Long and medium-term external debt by the end of August amounted to €33.87 bln, up 19.1 percent compared to December 2006.

FDI
Foreign direct investments (FDI) amounting to €4.05 bln (down 6.3 percent compared to January-August 2006) covered 40 percent of the deficit in the first eight months of 2007.