Mugur Isarescu: The Economy Can Only Go Up

From this point forward, the Romanian economy can only go up, according to Mugur Isarescu, Governor of the National Bank of Romania. However, the pace remains unknown. "We should be concerned with the quality of the growth in order to avoid going back to the same problems," he said.

Romania will resume economic growth starting in Q3, or Q4 at the latest, on a quarter-to-quarter basis, Governor Isarescu announced. "If we judge by the industrial output, the economy has already started picking up and is currently recovering. We started from (-)12% and we are now at (-)6, notwithstanding the fact that the figures become available with a delay of at least two months," he said.

• Foreign deficit sustainable at 8% of GDP if foreign investments reach 5-6% of GDP

The current account deficit could become sustainable at 8% of the GDP, but only if foreign investments reach 5-6% of the GDP, in addition to the structural funds attracted by Romania, Governor Isarescu added.

• The crisis was both a trigger and an accelerator of current account deficit adjustments

An increasing current account deficit is hard to avoid, considering the cyclic pattern of capital inflows, Mugur Isarescu said. In his opinion, temptation was extremely great, considering that the country went through an international cycle of capital abundance and then scarcity. "It would have been very hard to avoid an increase in the current account deficit in the last four years," he said.

The deterioration of the current account deficit could have been mitigated, if certain unsustainable trends in the private sector - such as salary growth above productivity and a very strong lending surge - had been counteracted by prudence in the public sector.

A change in the investors" perception of Romania accelerated such adjustments, Governor Isarescu added. "The crisis is both a trigger and an accelerator of adjustments," he said. "To us, at the National Bank, it was no surprise that the ebb followed. However, it is also true that the National Bank underestimated the magnitude of this adjustment," he said.

Looking at the economic growth, we could say that we are having quite a hard landing. Governor Isarescu believes that we will see further adjustments of the economic growth rate and the industrial output. However, in his opinion, "if we look at the unemployment rate, it doesn"t look like a hard landing."

• National Bank governor, too optimistic about European fund absorption

Progress in attracting European funding was below the minimum estimated by the National Bank, Governor Isarescu admitted. He believes that all efforts must be channelled towards European funding as "Romania will repay the 20 billion euro we borrowed from the international institutions from the 30 billion euro we should take from the European Union." However, it will be very hard to secure such an amount, as it is formed of tens of thousands of small projects, which are hindered by bureaucracy and legal gridlock.

• Romania, a credibility importer

A country should export credibility and face hardship with proof of capability to act, but Romania imported credibility by turning to the international financial institutions, Governor Isarescu noted. In his opinion, the authorities did what they should have done, considering the ongoing economic crisis. The financing agreement with the international financial institutions is meant "to compensate for the lack of generosity of the private capital owners."

• Banks, too cautious

Romanian banks are overreacting to the current economic context, being excessively prudent with their customers, so more flexibility on their part would be quite necessary, according to National Bank Governor Mugur Isarescu. He warned that, when banks decided to start helping their customers, it could be too late.

In Isarescu"s view, banks also exaggerated before the crisis, when they were inviting customers to take "instant loans" by simply showing their ID, as recently as September 2008. Consequently, the rupture between economic performance before and after the fourth quarter of 2008 was extremely abrupt.

• Euro convergence process, still achievable

Romania must join the EuroZone in 2014, as per the existing roadmap, but a budget deficit below 3% of the gross domestic product is one of the mandatory conditions. The EuroZone convergence process is still possible, but only through a major shift of focus from the inflation rate and the interest rates to the public deficit, National Bank Governor Mugur Isarescu said. In his opinion, the unsustainable breakdown of budget spending is top priority.