The budget deficit will remain Romania’s main problem in the near future. It creates inflation, tax increases, and decisions to reduce it nullify economic growth. The deficit will remain unsustainable for the country’s economy even if reduced from 8.5% to 6.5% or 7%. We can say we have escaped the complicated situation when it reaches 4%, most likely by 2028, explained economist Adrian Codirlașu.
Representative quotes:
- We are in a positive scenario, it could have been much worse, and we avoided being downgraded to the junk category, the category not recommended for investments. When a country is downgraded to the junk category, capital automatically leaves.
- When subsidies are received from the state because the activity is not economically viable, then the Government should intervene with efficiency measures, conditioned by certain reforms to streamline administration.
- We have a great opportunity that we should take advantage of, namely European funds. If we put them all together, the amount that could be attracted is impressive. It starts with 20 billion euros. If we take that money, yes, economic growth will look completely different.
- When we are in the OECD, our country will be treated just like any other OECD member state. This means much greater credibility and the possibility for certain foreign investors, from outside the European Union, to decide to invest in Romania.
How have we coped with austerity measures so far?
I would say we are in a positive scenario, considering it could have been much worse. We avoided being downgraded to the junk category, meaning that category not recommended for foreign investments.
There has been much talk about avoiding the junk category. To help people understand, what would junk have meant? How many billion euros would have disappeared from the economy?
Being downgraded would have caused a shock that could have led to a financial crisis. If we remember, the 2008 crisis started precisely with Romania being downgraded to the junk category. When a country is downgraded, capital automatically leaves.
This happens because certain institutional investors, such as pension funds, insurance companies, and various investment funds, are not allowed, by the regulations they adhere to, to expose themselves to the junk category. For example, pension funds in Romania have the same provision in legislation. They are not allowed to invest in junk, with one exception: bonds issued by the Romanian Government.
Practically, this means that regardless of how high the returns in Romania might have been, certain investors would have withdrawn because legal or internal regulations would no longer allow them to proceed. It would have been a disaster, exactly as discussed at that time, a real danger.
Why is it so difficult to reduce public spending in central and local administration?
I believe a reform focused on demographic tracking is necessary, especially in local administration. Some localities have depopulated, so the subsidies received should be proportional to the population there. Alternatively, multiple localities could be managed collectively.
This would significantly reduce personnel expenses, and investments would be made in multiple places simultaneously, making it easier and cheaper to manage.
Everyone agrees in public discussions with this reduction; it all seems logical. However, when you want to make such a decision, it must turn into a political decision and face a certain resistance. The resistance comes from both within the parties and from those working in local administrations.
How can a compromise solution be reached for the implementation of local administration reform?
Generally, when a financier provides the funds, they have significant negotiating power. So, when some localities receive subsidies because they cannot manage themselves, those subsidies must come with conditions to streamline activities, as they are paid by all of us, which is somehow unfair to the rest of the population contributing through taxes and duties.
So you're saying the Government could provide funds conditionally?
Conditioned by certain reforms to streamline administration.
Of course, there are extremely wealthy localities that collect funds from local taxes and do not need subsidies from the state budget. They can decide how to organize themselves. However, when subsidies are received from the state because the activity is not economically viable, then the Government should intervene with efficiency measures.
Now tell me, is there a threat next year regarding a major imbalance in Romania?
I believe it is possible for the economy to achieve a slightly better result next year than this year. However, economic growth will still be below potential. For example, our survey for October shows that participants anticipate GDP growth in 2026 somewhere below 1%, indicating modest economic growth.
However, we have a significant opportunity that we can benefit from, namely European funds. If we combine them all, the amount that could be attracted is impressive. Around 20 billion euros. Historically, Romania has received at most about 12-13 billion euros in a year.
Here, I see a great opportunity. Even if we maintain the trend of 12-13 billion, it's fine, but we can do much more. Anything beyond these 12 billion would be a boost for the economy and would bring growth of over 1%.
We also have the NRRP, either we take all the money next year or we don't take it at all. We haven't been very successful in attracting the NRRP, so I am quite skeptical that the 10 billion will be obtained.
We also have funds for agriculture, structural funds, and the SAFE funds. We are the second-largest beneficiary in the European Union under the SAFE program. These investments need to be made quickly in the next two years to be relevant in the current geopolitical context. Therefore, the NRRP and SAFE are the two major programs that we need to pay close attention to in order to attract as much funding as possible. This money will go into investments and create jobs and economic growth.
(Note: SAFE is a European program for the development of Romania's defense industry and infrastructure, funded by the EU.)
Do you see in 2026 an opportunity corridor for Romania based on attracting European funds and the two major investment programs?
It is a great opportunity. I have shown that we have the institutional capacity to attract 12-13 billion euros. The issue is different: reforms. Can we make them to receive that money?
I cannot move on without asking you something about OECD. There is a lot of discussion these days. We have a position from the President of Romania regarding the fact that the legislation has been changed and somehow next year Romania could become part of this economic cooperation and development organization.
If we were to join this organization, any OECD state (38 member states) would treat Romania like any other member state of the organization. This means a huge credibility boost for Romania.
It would offer the opportunity for certain foreign investors, from outside the European Union, to consider coming to the country. In the OECD, there are 38 members, many of which are not from the European Union. This would mean an opportunity for Romania to attract investments from Japan, the United States, Canada, South Korea – highly developed states that generally have not invested large sums in the Romanian economy yet.
OECD membership guarantees the application of certain governance rules in Romania, how they will be treated by authorities. The investor's guarantee is essential that once they enter here, they can move their capital, recover their profit, respecting the organization's rules.
What else needs to be done to be accepted into the OECD?
Let's adopt their best practice codes and, most importantly, the best practice codes regarding corporate governance of public companies. These codes establish details such as the number of members on the board of directors, who appoints them, for what period, and how they are remunerated.
All these measures lead to a more efficient management of public companies. It is evident that out of the 1,500 public companies we have, very few are profitable. An improvement in governance can bring profits to the Government from their profits and avoid the need for subsidies.
Another topic discussed in the public space is related to the sale of a number of shares of profitable public companies by the state. There has been much talk about the opportunity to sell share packages to finance the deficit. Is this something that needs to be done? Under what conditions?
We at CFA Romania actually had a paper on this topic, launched in October at the Bucharest Stock Exchange. A few days later, Prime Minister Ilie Bolojan announced the intention to privatize what we were proposing: minority stakes in state-owned companies.
This means that the state retains control, deciding what happens. However, the Bucharest Stock Exchange already has governance codes that are fully compatible with those of the OECD. Those companies would be subject to those codes. It would be a listing requirement.
In our paper, we also showed that the profitability of those companies would significantly improve after listing, which means profits for the state from dividends. We see that those state-majority listed companies currently give away almost all their profits as dividends.
What amount is mentioned in the proposed project? How much could the Government get back from the sales of shares of public companies?
The amount could range between 10 and 20 billion euros from these listings. It's a significant sum. As it is a one-off sale (meaning it's a one-time event, not recurring), it does not factor into the deficit calculation, going directly into the Government's reserves.
This would quickly lead to lower loan interest rates, as it would be enough for the Executive to show that it has financial reserves to be able to wait for lower interest rates. The Government would have a very wide margin to work with. This would reduce the burden of external debt. We already see that what we pay on public debt is quite high.
Let's talk a bit about Romania in the international economic context. We see some nervousness in the stock markets regarding AI efficiency (Artificial Intelligence). There are some technology companies, like NVIDIA, that have seen significant growth. Is there a risk of a global crisis, such as the Dot Com crisis (the emergence of the internet and websites) from the early 2000s?
Valuations of these IT sector companies are quite high. However, in the case of the Dot Com crisis, it was enough for a company to create a website to drive up stock prices. In the case of AI companies, we see that they are already generating profits. NVIDIA is actually making a lot of money, with consistent profits. It's not like the Dot Com era when new digital companies produced nothing.
Indeed, markets are expecting even more. Anticipations involve quite a few trillion dollars in new investments, in data centers.
In fact, we are witnessing a race between the United States and China to remain relevant in AI. The United States, which has the money and the most advanced chip technology (microprocessors), is striving to be the first to make these investments in data centers, investments that are already visible in the economic growth of the United States. They are seen in the economy, enhancing the efficiency and profitability of companies by automating various processes.