EUROPE BEGINS SLOW RETURN TO NORMALITY

EDITORIAL

by Cristian Cojanu

As the continent slowly emerges from long COVID-19 lockdown, the European Commission's Spring 2020 European Economic Forecast paints a sobering picture of economic tough times ahead. "In the current quarter, economic output in the EU is set to be almost 16% lower than in the last quarter of 2019. Although activity is expected to pick up again with the justinitiated, gradual easing of containment measures, the contraction in EU GDP this year is expected to be 7½%, far deeper than during the financial crisis in 2009," Maarten Wervey, Director General Economic and Financial Affairs, wrote in the foreword to the report.

The report expects the EU's GDP to rebound in 2021 by 6%. "The COVID-19 crisis is a symmetric shock hurting all Members States. Their strong economic interconnectedness is magnifying the aggregate demand and supply shocks. While the recovery looks set to be incomplete in almost all countries, the impact of the crisis and the way Member States will emerge from it is set to be uneven."

For Romania, the report projects a steep real GDP decline in 2020, after several years of solid growth. "Private consumption, the main driver of growth in recent years, is expected to be impacted severely by the lockdown measures. Uncertainty is expected to hurt investment decisions, while net exports are projected to contribute positively to growth. Unemployment is set to increase while inflation is forecast to ease due to the drop in oil prices. In 2021, real GDP is projected to rebound, though not to precrisis levels. The budget deficit is projected to increase significantly as the fiscal measures required to fight the COVID-19 crisis come on top of past fiscal slippages."

Thus, the country's real GDP is expected to contract by 6% this year and rebound by over 4% in 2021. Private consumption is seen increasing gradually and contributing positively to growth next year.

The report also indicates that the general government deficit is forecast to exceed 9% of GDP in 2020. "The preexisting expansionary trend largely driven by pension increases is set to be reinforced by the impact of the COVID-19 crisis." Moreover, the debt-to-GDP ratio is forecast to rise from 35.2% in 2019 to over 54% in 2022.

Identifying similar economic threats, Moody's and Fitch changed their respective outlooks on Romania's ratings to negative from stable. "The revision of the Outlook reflects the substantial worsening in Romania´s public finances expected in the short-term as the outbreak and spread of the COVID-19 pandemic aggravates an already weak fiscal position," a Fitch Ratings press release pointed out, emphasizing that deficit was forecast to widen to 8% of GDP in 2020 from 4.6% in 2019. Fitch expects the deficit to narrow to 4.2% of GDP in 2021, driven in part by a recovery in economic activity.

In turn, Moody's noted that "this year's economic recession in the context of the coronavirus outbreak weighs on Romania's fiscal outlook," forecasting a 5% GDP contraction. In addition, Moody's expects the general-government fiscal deficit to reach 7.7% of GDP this year and 6.2% of GDP in 2021.

While the full impact of the coronavirus pandemic may still be difficult to predict, Business Arena is going to continue to keep an eye on all the issues affecting the business community, reflecting its views, hopes and challenges.

IT’S THE BEST TIME TO BUILD THOSE MOTORWAYS (AND MODERNIZE THE RAILWAYS FOR THAT MATTER) IT’S THE BEST TIME TO BUILD THOSE MOTORWAYS (AND MODERNIZE THE RAILWAYS FOR THAT MATTER)

Ovidiu Constantinescu

BY OVIDIU CONSTANTINESCU, FACE PR AND NEWS

Cycling enthusiasts know what I mean: you are happily riding at full speed when, all of a sudden and out of nowhere, a stick finds its way between the spokes and the front fork. The bicycle stops as if it hit an invisible wall, while the rider is propelled forward, tumbling in the air and hitting the ground, crushed by its weight: another one bites the dust. This is precisely the kind of thing that happened to the world economy: out of nowhere, a microscopic THING sends the mighty world tumbling down. Never before has the global economy crashed so suddenly and so deeply. Never before has the crash affected all major economic sectors and never before did they stop working almost simultaneously. Never before did tens of millions of people find themselves unemployed literally overnight. The 2008 – 2010 financial crisis looks like child’s play in comparison with what we are facing now.

As for Romania, the economic pandemic could not have come at a worse time: a budget deficit over the EU limit despite economic growth for the past four years, higher and higher public expenditure due to unrealistic growth of salaries in the public sector, a (legal) promise for yet another 20% rise in pensions, a crucial election year, with both local and general elections. What else can go wrong?

Well, something even worse may loom in the future, if the people in power put the short-term electoral gain before the long-term economic rational reasoning. And the signs are not encouraging at all. So far, the government promised milk and honey for everyone: utility bill payments suspended; loans reimbursements postponed; taxes postponed too; financial aid and financial stimulus for various kinds of companies. Is it the right way to buy one’s way out of the current catastrophic situation? Honestly, I doubt it. Mind you, even the electricity companies need money to pay salaries and buy stuff to keep the critical infrastructure up and running. Where do they get cash from? The same goes for gas, for internet, for telephony. And even the dreaded banks, where to they get the money to bankroll the government’s social expenditure or to finance recovery projects?

History has shown us that the Romanian government – regardless its political color – is a pretty bad poker player and only sheer and undeserved luck has helped the country to pull through. Right now we are just beginning the game and we really do not know how long it is going to last. Despite not having a clear good hand, we are betting on it, while we don't even have enough cash on the table. Nor do we have someone willing to lend us cheap money until we might get a straight flush or at least a full house. The Romanian government was betting on winning

two rounds of elections – in June and November - no matter what. But so far the game is not going the Government’s way. It bet on early elections, while the Faith had “postponed elections” in its hand. It bet on a manageable deficit, and the Faith cleared out the table with “ANAF failed to collect money”. The Government bet on “give aid”, while the Faith cynically tabled a “no more money in the coffers” four of a kind. See what I mean?

So what has to be done in order to restart the economy? Needless to say, first of all we should leave the poker table. Second, we should look and learn from history. Thirdly, we should denounce the “do now-think later” logic that has so tragically marked the Romanian way of solving problems.

As the first one is obvious, let’s turn to history, which has taught us that the state should not plunge into the abyss alongside its subjects – citizens and companies alike - but stay out and throw us the rope so we can climb up and rise from the pit in which we have fallen. In this respect, I believe that the idea of the state buying stakes in private companies to capitalize them is silly. Living aside that the Romanian state’s managerial track record is nothing to be proud of, such a measure would open wide the gates for corruption, the final result being that the money would be spent on some carefully chosen companies that even in the best economic climate have delivered nothing else but losses.

Instead, the State should invest in major projects that will benefit the entire society and will act as a catalyst for the whole economic chain. The state should not become a hysterical money spender just to give the impression of doing so - mething, but a wise and choosy customer that buys only things that have potential to produce real and material wealth, goods and services that will help it grow and develop, and thus improve the citizens’ lives.

And, boy, we have so many badly needed things to do: to build the motorways: from Pite[ti to Sibiu, from Ploie[ti to Suceava, from Târgu Mure[ to Târgu Neam], from Pite[ti to Craiova and Oravi]a and from Oravita to Lugoj, from Drajna to Braila, Gala]i and Tulcea and from Bra - [ov to Oradea. Let’s modernize the entire railway network and build high speed trains capable to link Bucharest to Budapest and Vienna and further beyond. Let’s modernize the crippling electricity network, let’s clean up the ecological mess and create vast natural parks, let’s invest in cuttingedge research and development facilities and in schools that belong in the 21st century, let’s invest in new and efficient projects, let’s build hospitals and fill them with state-of-the-art me di - cal equipment, let’s build underground metro systems in major cities like Cluj, Iasi, Timisoara or Constanta, let’s cut the red tape and demolish the paper-based bureaucracy and embrace the digital administration of the state.

Let’s get back to work!

THE SLEEP OF REASON PRODUCES MONSTERS

The unprecedented fiscal stimulus measures taken by developed countries in the fight against the Covid 19 pandemic have induced among emerging countries an illusion that economic laws can be suspended, and, after all, there is a "free lunch" that no one has to pay for, now or in the future.

BY VALENTIN LAZEA

Encouraged by that illusion, members of the Romanian Business Leaders foundation and ten other business organizations recently asked the Government to access a 30 billion euro (almost 15% of GDP) financial assistance package to help recapitalize domestic companies and restart the economy. This suggestion represented a mimetic move ("if others can do it, why can't we?"), but it did not take into account the following aspects: - what is allowed to developed countries is not allowed to emerging ones, such as Romania. If our business people read carefully all the proposed fiscal and monetary easing methods (such as Quantitative Easing, Helicopter Money, etc.), they would find out that their authors emphasize that those methods make sense in developed economies (USA, Germany, France), and are in no way recommended in emerging economies. This difference in approach is due to the fact that markets are willing to tolerate much higher levels of indebtedness for developed countries (over 100% of GDP for governments and over 300% of GDP for all sectors), while for emerging economies the level of tolerance is about half of that. This dual approach has the following explanations: 1. What counts for creditors is not so much a country's debt level, but the balance between debt and receivables. For example, the United Kingdom has a total debt of over 300% of GDP, but it has receivables from the rest of the world even higher than that figure, so, overall, the country is a net creditor. In turn, Romania has very few receivables from the rest of the world, and even if it has a total debt of only about 120% of GDP it is a net debtor;

Creditors look at a country's accumulated net worth that can be liquidated to pay off a new loan. Thus, countries such as France, Germany, Italy, Great Britain have a net worth equivalent to five times their respective GDP, based on their history, as many - but not all - were great colonial powers. In Romania, the net worth amounts to about 1.4 times its GDP, so its ability to repay a possible mammoth-loan is much more limited. 2. Developed nations are going to pay an exorbitant price for the current tax extravagances. Their economists are already looking for unorthodox ways to reduce the huge debts that will result: financial repression (i.e. states paying belowmarket interest rates for a long time and keeping bank interest rates below inflation), significant increases in inflation to erode the contracted debt in nominal terms, massive debt relief measures (generating moral hazard, as they penalize good debtors), etc.. Economic laws cannot be suspended, not even in developed countries: someone will have to pay for today's consumption. This

VALENTIN LAZEA

conclusion is also valid for emerging countries, such as Romania. Moreover, bringing purchasing power from the future to the present - in the name of overcoming the crisis - will also raise the issue of intergenerational equity. Already the young generation is called upon to make sacrifices and protect the elderly in the context of the essence of the problem: most aid funds will come in the form of loans and not grants. It is true that the European Commission will give up co-financing requests this year, thus reducing the budgetary effort of recipient states. And it is equally true that European funds will be created, having the characteristics of grants. But the really

pandemic; add to this the huge cost of the environmental programs that will be implemented in the coming decades and, above all, add the cost of interest to the trillions of euros or dollars that are circulating today and that the younger generation will have to repay: don't you think this is too much? 3. Because this is the important amounts will come in the form of loans, bearing interest and with conditionalities attached. It is enough for us to notice the difficulties in accessing new loans encountered by Italy, which is an important eurozone member, hit hard by the pandemic, with a budget deficit of less than three percent last year, and a large public debt, but owned mostly by citizens and domestic companies (that can be rolled over forever). What preferential treatment could Romania hope for, while it is not an important country at EU level, it is not a member of the eurozone, it was moderately hit by the pandemic, it had a budget deficit of over four percent in 2019, and its public debt - even if it is small - is owned in significant proportions by nonresidents (who can always request the repayment of loans)? 4. If we look at the economic aid packages implemented by countries comparable to Romania, we find the following: in Poland, most of the package of about 10 percent of GDP consists of state guarantees, which may never be activated. In Hungary, a large part of the package is represented by measures that were already implemented years ago: it is as if the Romanian government promised to reduce the VAT rate to nine percent on foodstuffs or reduce the income tax from 16 to 10 percent. Otherwise, the actual measures taken to support the economy in Romania are not significantly different. 5. Through the pro-cyclical fiscal easing started in the summer of 2015 and continued until the end of last year, Romania has exhausted all ammunition it could have used in times of crisis. Because it is one thing to go from a budget surplus of one percent of GDP to a deficit of three - four percent (like Germany and Bulgaria) and quite another to go from a deficit of 4.3 percent of GDP to a deficit of seven percent (without taking into account the enforcement of the pension law). What kind of leniency can Romania expect from the European Commission under the circumstances? A recent development that went mostly unnoticed was that the EU member states voted unanimously to launch the excessive deficit procedure against Romania, which shows two things: that the Stability and Growth Pact has not been forgotten and even the states willing to be lenient with Romania could not turn a blind eye to the enormity of the deficit figure (obtained in times of economic growth). 6. Romania could also consider an IMF loan, similar to the 13 billion euro borrowed in 2010. However, it is important to note that the Fund does not support the recapitalization of companies through its programs, but it lends to states for the purpose of preferential financing of external deficits. Even assuming that a derogation could be obtained in this regard, does anyone really believe that the IMF will provide money without strict conditions on reforming finances and the real economy? And a first conditionality that the Fund could rightly demand would be to see that the private sector in Romania capitalizes the companies it owns so they can meet the minimum level required by Law 31/1990. According to some calculations, the necessary additional capitalization would amount to about 30 billion euro, which is exactly the amount currently requested by the private sector in the form of a financial assistance package. 7. Even in the unlikely scenario that the Commission and the Fund could be convinced to treat Romania with lenience, it would still not be enough without a similar treatment from the rating agencies and the markets. And here, Romania's credibility hangs by a thread, hovering at the lowest investment-grade level, and any downgrading action could send it to the junk category. In order for this downgrade not to happen, the rating agencies are going to want to see the country's determination to reduce the budget deficit, rather than measures that might widen it in the future.

In conclusion, any widening of the current deficit or debt in the name of overcoming the crisis will extend the time needed for a return to normal in the post-crisis period, increasing the costs attached and amplifying the reforms that will have to be made. In this context, the Government would do well to resist calls for uncritical imitation of practices in developed countries, even if this is difficult in an election year. The opposition should curb its urge to overbid any economic measures, as the popular vote may bring it to power in a toxic economic context of its own doing. The foreign employers' organizations in Romania (Foreign Investors Council, Amcham, etc.) should temper the enthusiasm of their colleagues in the Romanian employers' associations, and Romanian employers should be careful what they wish for: it may come true. www.opiniibnr.ro

They have achieved a high level of recognition. Therefore Business

Arena Magazine proudly announces the upcoming special awards gala dedicated to the ladies that The World Bank’s Women, Business and the Law index reveals wide variations in women’s rights at work. Overall, it says women have only threequarters of the employment rights that men enjoy. The nations with a perfect score in the Index are Belgium, Denmark, France, Iceland, Latvia, Luxembourg, Sweden and, joining the list this year, Canada, which recently improved parental leave rights. In these countries, the index shows, women who work are on an equal legal standing with men, measured on indicators including access to jobs and protections on gender discrimination and sexual harassment in the workplace. Although there have been improvements in many areas, with 40 nations enacting reforms to improve gender equality in the past three years, in the Middle East and North Africa, women workers still have just half the legal rights of their male colleagues. make a difference in business. Experts agree that Romania has seen some improvement in gender equality in recent years, but efforts must still be made to ensure equal opportunities for men and women in the workplace. In this context, Business Arena continues its tradition, celebrating women’s achievements and their vital contribution to the success of business and banking activities throughout Romania. On this note, our publication proudly announces the upcoming special awards gala dedicated to the ladies that make a difference in business.

The Most Admired Business Women Awards Gala 2020 will bring together entrepreneurs, investors, business leaders, diplomats, and professionals from a wide range of sectors to celebrate the successes of women in business.

For more information please contact Cosmin Stangaciu at cosmin.stangaciu@business-arena.ro or phone 0755.274.125

BANKS SHOULD BE SEEN AS PARTNERS IN THIS CRISIS

The banking system is the solution to Romanian economy's recovery from the upcoming recession. Under the impact of the COVID-19 pandemic, Romania's economic recovery could have a "V" shape, with declining production and investment, temporary stagnation of business, the phase of temporary decline in economic activity, followed by a rapid recovery, or there could be a U-shaped recovery, with the extension of the stagnation period.

BY GABRIELA FOLCU} EXECUTIVE DIRECTOR, ROMANIAN ASSOCIATION OF BANKS

The COVID-19 pandemic has created additional challenges with unprecedented economic and social consequences globally. The effects of the pandemic could push the world economy into the biggest recession since the Great Depression. Before this health crisis, the world economy was expected to grow, but now it is estimated to decline by 4-5%. Globally, the closure of non-essential activities produces a monthly loss estimated by experts at 3-4% of GDP. The magnitude of the impact on the economy depends on the duration of the health crisis. In addition to the effects of the pandemic, we are going through a period of transformations and challenges at international level, generated by Brexit, the rise of populism and extremism, Basel IV, and the erosion of investor confidence. Romania must be careful not to internalize these problems through the measures it adopts, given that Romania has the highest level of twin deficits in the European Union.

Romania cannot eliminate the effects of the COVID-19 pandemic in the economy, but it can mitigate them and it could prevent a financial crisis by eliminating the legislative risk in the banking sector.

The effect of contagion is inevitable. The financial system is the heart of the economy. If the heart pumps properly, the flow of muchneeded funding is ensured during the nearing recession. The circulation of capital is essential. Capital flows between economic sectors slow down in a crisis. Any deviation only delays economic recovery.

Now, the banking system is the solution to economic recovery, and dialogue is the key. There is an urgent need for sound economic thinking and balanced initiatives and measures.

The banking system in Romania is better prepared for the coming economic crisis, compared to 2008-2009, but there are a number of exogenous and potentially endogenous risks. Solvency and liquidity indicators are well above the minimum required levels under national and international regulations. The solvency ratio stood at 20% at the end of last year, while the immediate liquidity level was 41%. Even the non-performing exposure rate fell very close to the European average, standing at 3.98% in February 2020. The positive aspect is that some of these risks can be avoided and, thus, the banking system remains strong and capable to cover the financing needs of the economy. The challenges to financial stability lie in a mix of risks amplified by the COVID-19 pandemic. On the one hand, there are heightened legislative risks in the context of an election year, and, on the other hand, macroeconomic tensions, aspects that are followed with interest by the rating agencies.

The exogenous risks lie in the unpredictable legislative framework that also affects lending. Currently, there are at least eight laws/ bills that can irreparably affect the activity in the banking industry. With such legislative initiatives, Romania is taking steps back in the process of economic development.

Depriving credit institutions of a large chunk of revenues resulting from lending operations, including repossessed properties, under a law to be analyzed by the Romanian Constitutional Court, could have a negative impact on lending.

Gabriela Falcut

Moreover, the need for more provisions for the incident portfolio is likely to seriously affect lending in Romania. Let's not forget that Romania has the lowest degree of financial intermediation (25%) among European Union states (83% average). Access to loans also shows disparities at national level. In Bucharest, about 65% of adults have loans, compared to the national average of 36%.

Because of these legislative initiatives, lending activities may be affected both on the supply and demand side, with the latter hopefully affected for a short while. The balance of nongovernment loans increased by 6.9% annually in March, compared to March 2019, and by 0.6%, compared to February. It is a relatively normal increase in lending, but there is a slowing down trend. We will probably see the effects of the crisis on lending reflected in statistics starting April. Banks will focus on financing companies to ensure a speedy recovery of the economy. In this segment, a potential risk can be generated by insolvencies, as commercial loans are prevalent in Romania, with a 3:1 ratio compared to bank loans.

It is very likely that this health crisis will turn into a financial crisis. States are going to need funding to cover deficits.The economic stimulus solutions include financing. That is why it is advisable for the banking system to be a partner in this crisis. The banking system calls for a constructive partnership with the authorities to finance the restart of the economy's engines in predictable conditions.