European Commission, alert mechanism for Romania: Projections show the deterioration of the net investment position in 4 scenarios

The European Commission suggests, in an alert mechanism, that the main priority of the Romanian Government should be to follow “a credible path of fiscal consolidation” in order to mitigate the risks to the stability of the economy.

The Commission published on Monday, as part of the alert mechanism (which identifies member states facing macroeconomic imbalances), the in-depth balance sheet for Romania.

In the report, bad news for the Ministry of Finance: The net international investment position is set to deteriorate sharply over the next 10 years.

Alarm signal – 4 scenarios: the net international investment position will deteriorate significantly

The document states: Romania’s net international investment position (NIIP) is projected to deteriorate significantly under a number of scenarios, based on various underlying assumptions.

In the baseline projections, which take forecasts to 2025 as a starting point, NIIP falls below the projected prudential threshold to reach nearly -70% of GDP at the end of the forecast period.

In an optimistic scenario (Scenario 1), a 2 percentage point improvement in the trade balance and a 1 percentage point decline in the debt interest rate each year relative to the baseline assumptions still implies a slight worsening of NIIP at the end of the forecast period.

If the trade balance deteriorates further and the debt interest rate rises compared to the baseline assumptions, NIIP would deteriorate and reach -100% of GDP in 2033 under the pessimistic scenario assumptions (Scenario 2).

If the assumptions in Scenario 2 are still compounded by a lower capital account balance, as is the case in Scenario 3NIIP could decline another 10 percentage points by 2033.

Vulnerabilities related to foreign and fiscal accounts

The conclusions of the report:

“Despite some improvements, Romania still faces vulnerabilities related to its external and fiscal accounts. The large current account, large government deficits and high inflation rate – all of which are above pre-pandemic levels – make the economy potentially vulnerable to shocks.

There has been some progress in reducing the current account deficit in 2023, mainly due to monetary policies and weaker private consumption.”

Read the full analysis of the European Commission – evaluation of Romania’s balances: Projections show the deterioration of the net investment position in 4 scenarios per Government Course