A political crisis invariably puts pressure on the national currency, but the really dark scenario for Romania is not related to an out-of-control exchange rate, but to a possible derailment of the fiscal-budgetary consolidation. In an interview given to “Adevărul”, the academician Daniel Daianu, the president of the Fiscal Council, emphasizes the fact that the leu will not collapse, even in the scenario in which the censure motion is adopted, the way the National Bank acts to provide an anchor of stability in a period dominated by uncertainties and why the existence of an approved budget saves us from a much more serious economic shock.
At the same time, Daniel Daianu analyzes the postponed prospects of interest rate cuts in the context of global and internal tensions, and underlines the vital need for the country to maintain its credibility in front of investors.
The truth: What are the causes of the pressure on the national currency during this period?
Daniel Daianu: Anywhere in the world, a political crisis puts pressure on the national currency. There is no great philosophy in what is happening, and Romanian citizens know from their own experience. The country has gone through political crises before and each time there was pressure on the national currency, interest rates moved, loans, financing and refinancing were made difficult. The previous crisis was linked to the presidential elections, and we remember how all these landmarks moved. So it’s not something new. And, as we started our discussion, any political crisis, in any country, is seen in the financial markets, because they are the most sensitive. They react immediately and sometimes over-react, which is what is called overshooting. So it’s not surprising.
Were there large capital outflows by institutional investors?
I can’t tell you for sure, but there may be an assumption from this point of view, which is also natural, because it happened in other episodes. In Romania, capital enters and capital leaves, because it is an open economy, because it needs financing and refinancing, because government securities are purchased and sold on the secondary market. They are bondholders who are perhaps more risk averse, they are looking to limit their losses and they are exiting, meaning they are giving up some gains and they are exiting. This whole period is one of turbulence, but it will end one way or another. Unfortunately, the longer it goes on, the worse it will get.
If the motion does not pass, should people expect the lion to return to the previous rate?
Yes. What matters most, and I don’t want to get into a political scheme discussion now, is the credibility of the country. Romania’s budget is financed not only by foreign investors. They are pension funds, they are Romanian citizens who directly purchase state securities. What matters most for all those who invest in Romanian bonds or make investments in Romania is for the country to regain credibility, primarily by reducing the budget deficit. Let’s see that Romania, from 7.65% of the GDP deficit on cash last year, is moving towards 6%, 6.2%, i.e. as the budget structure is programmed, and that this correction process continues. This is the most important element. The credibility of the country depends in this period on fiscal consolidation.
Is there, however, an element that differentiates the current situation from other political crises?
I would say that we are not in a crisis where we don’t have a budget. What if we had a political crisis at the beginning of the year, with no approved budget? It would have been much worse, because it was not clear what the budget would be, if the fiscal-budgetary consolidation process continued. Romania has a budget. It is highly unlikely that, if the motion passes, it will derail the fiscal consolidation process. The motion passes, the motion does not pass, it continues with a minority government, but the budget exists. There are question marks related to how much we will be able to absorb from European funds, it is true, we operate with imponderables, but the budget exists and this is an essential element.
Black Thursday for the leu against the euro. The NBR explains the depreciation: “This is what happens in troubled times”
There are voices saying that the leu has long been overvalued and that some necessary corrections are now being made. How do you see this?
I have also seen statements that the lion should be completely free floating. Those are fundamentalist views. Those people, some of whom are economists, should understand that it is one thing to make a controlled correction in conditions of relative calm, admitting that you have an overvalued national currency, and quite another to let the course run wild in a period of great turbulence. The exchange rate must not be out of control. The National Bank acts with great care and it is no secret, the governor also declared, that in May last year it intervened. Any central bank in the world, in difficult times, takes into account the dynamics of the exchange rate and cannot be impassive.
On the other hand, if you take the depreciation as a percentage, you will see that it is not very high. But the movement of the course in us influences the collective psychology. People got used to a relatively stable exchange rate, and this was a policy of the National Bank that I consider wise. In a world with so many uncertainties, the pandemic, the invasion of Ukraine, the energy crisis, the war in the Middle East, the relative stability of the exchange rate served as an anchor. People need some sort of safe ground when things are going crazy. So I think it would have been a big mistake to leave the course completely free.
There are analysts who claim that the euro will reach 6 lei. How do you see these forecasts?
It won’t go to 6, like some said, 6, 7. No, that won’t happen. Think that even the National Bank, to intervene to support the course, would not do it if it saw that we were entering a path with no exit. The country will be governed, either the Bolojan government is maintained if the motion does not pass, or a new government is formed that will go with the existing budget and will not derail from the fiscal-budgetary correction process. There will be pressure on the course, it is true, and the sooner the political situation is resolved the better. But the course will not drive her crazy.
BNR reported on Friday that the worst is over.
Yes, because it is not the first time we face such a period. The truly dark scenario would be one in which a budgetary correction is made that reverses the adopted measures. I have heard voices saying that the VAT will be dropped. Those are extravagances that collide with reality. That would be the scenario in which the issue of the rate would really arise, because the NBR is not a factotum, it does not have a magic wand. But I don’t believe in that. Let’s hope that either the motion does not pass, or if it does, a government is formed very quickly and we move forward.
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We remain with our big problems, with the known colds. There is corruption, there are people who don’t want change, they don’t want transparency. But the country is developing, we have a market economy, there is an entrepreneurial spirit, we have a business environment with quite strong domestic businessmen. There are many positive aspects in the progress of Romanian society.
Under these conditions, will the BNR be able to follow its interest rate reduction calendar?
This reduction will take place, it will take place, but let’s get over this period first, let the crisis end, and let’s see how this inflationary mess materializes in the coming months. From the second part of the year it will be possible to imagine when the reduction of the monetary policy rate will take place. Now it is premature. We are still in political crisis and we don’t know when the war in the Middle East will end. And even if it does end, the consequences will be longer-term, because at stake are disrupted supply chains, crude oil and liquefied gas prices that will not return to previous levels. And we still have the tariffs announced by President Trump against the Europeans, on the export of automobiles. Tensions are high.
That is precisely why, in Romania, everyone must realize that losing the reins of fiscal consolidation would be a catastrophe. The markets will penalize us. We are all in difficulties, and the European funds do not ensure the financing of the budget deficit or the current account deficit, which is very large. We need to get through this political crisis with as little damage as possible, continue fiscal consolidation and build on what is being done right in this country. The economy is moving forward. And we will come to light, eventually we will come to light.
