– by Laurian Lungu, August 2012
GDP growth is the main factor that influences the path of the debt/GDP ratio. Romania would need an annual average growth rate of at least 2%, over the next two decades, to keep debt/GDP ratio on a sustainable path. Higher short and medium term interest rates would initially increase the debt/GDP ratio. A raise by 100 basis points of the real interest rate would add an additional 1.1% to the debt to GDP ratio. Eventually public debt would come back on a sustainable trajectory due to the assumed high GDP growth rate of 3%.
Given the existing currency composition structure of public sector debt, the exchange rate risk is relatively high. A 10% depreciation of the RON against the EUR would add more than the equivalent of 2% of GDP to the debt/GDP ratio. Clearly, there would be opposite effects on the debt/GDP ratio if the RON appreciates, as it is expected to happen over the medium and long term. In the short term, however, the risk is that a depreciation of the RON is accompanied by higher interest rates and/or lower GDP growth and/or higher budget deficit. In such circumstances the increase in debt/GDP ratio could materialise very rapidly up to appoint from where, bringing it down, would require a significant more effort.
If the current market conditions prevail, delays to bring the primary deficit into surplus over the next 3-4 years would increase the debt/GDP ratio to over 46% by 2016. And, if annual average GDP growth stays at 2% by 2030, the debt/GDP ratio would fail to fall quickly enough so that the stability’s ratio is ensured. Under this scenario, further cumulative negative shocks to either exchange or interest rates, or even a lower GDP growth, could push
public debt on an unsustainable trajectory.