National Bank of Romania published yesterday the latest data on foreign reserves. At the end of February they stood at 33.3 billion Euro. A comforting number for a small country like Romania. But what is behind this number?
The comfort from having a large foreign reserves is given by the fact that the central bank can intervene to support the local currency, in case there is currency crisis. Large FX reserves are a clear warning to all the would be speculators that this country is not to be messed with. Is this the case with Romania? To some extent yes. As a small open euroized economy Romania does use the size of the FX reserves as a deterrent.
The graph below shows the composition of the FX reserves, without gold, for Romania at the end of 2011. As you can see more than half of it, 21.3 billion euros, comes from the IMF+EC+IFI loan. The remaining 11 billion euros represent the value of the minimum reserve required for the banking sector plus proceeded from intervention in the FX market.
I am not worried about the NBR not being able to stave off any speculative attack. I do not agree with FX interventions but if applied by the NBR it has a big probability of being a success.
There is something else I find troubling. What happened with the 21.3 billion euros that the loan from IMF+EC+IFI has replaced gradually since 2009? I know that around 5 billion has been channeled from the banks’ minimum reserves requirements to the Ministry of Finance via few club loans. Another 2 billion euros have been used to pay for current expenditures – to cover the one month budget deficit. How about the rest? Is this really how much capital has the Romanian economy lost in the last three years, almost 15 billion euros? It seems so. I n fact if we assume that only half of the value of the club loans would be rolled over than we are looking at 17 billion euros that have left the Romanian economy in the last 3 years.
What lies ahead? TAs Romania will start paying back the loans to IMF+EC+IFI the NBR will have to find euros to put in place for the loan.
1) One source are the structural funds but that will not be enough. History shows that Romania does not have what it takes to bring in a large amount of these funds and I am sure that it will not develop the skills in the next 12 months. The focus is now on election.
2) Another will be to increase the foreign currency MRR for banks but that is not a solution also considering the current economic situation.
3) The third and most likely option is for the NBR to buy euros directly in the FX market and sell RON which will depreciate the RON.
4) A fourth option the Ministry of Finance will borrow more money in the international markets. A small Ponzi scheme if you will, borrow at higher costs to pay for a loan that payed for capital that fled Romania.
5) Finally, the best option will be for Romania to set up an economy with the right incentives to attract foreign capital. I would not hold my breath for this one.
As you can see there are few options but the time is running out. Which option do you consider the government/NBR will focus on?
My view is that they will rank them lie this: 3, 4, 1, 2, 5