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Romanian economy to face indirect risks of Brexit after temporary shock - analyst

Romanian economy to face indirect risks of Brexit after temporary shock - analyst Aura Socol (Author: Hotnews.ro)

BUCHAREST (Romania), June 27 (SeeNews) - Romania is already experiencing the inevitable effects of Brexit while facing indirect risks related to the high volatility of external markets following UK's decision to leave the EU, a local economic analyst told SeeNews.

"We must be aware that although Romania's macroeconomic picture looks good, there's no way the country could remain unaffected by such an external shock, be it temporary," economic analyst Aura Socol, Ph.D at the Romanian Academy of Economic Studies and adviser to the financial supervision authority, told SeeNews.

According to official data provided by Romania's central bank, BNR, in its financial stability report, the direct effects are relatively small, she added.

Unlike other European countries, Romania does not have banks with UK capital and the importance of English companies in the economy is minor. Furthermore, Britain does not absorb more than 5% of Romania's total exports, whereas British foreign direct investments account for only 2.5% of the total, Socol added.

However, Romania faces some indirect risks through economic relations with EU member states that have a significant exposure to Britain, such as Ireland, Portugal, Greece and Spain.

There is also the indirect effect of higher financing costs, of greater difficulty for the country to borrow on foreign markets at low cost. This impact can be moderate, Socol said, as Romania has buffers to cope with temporary financial and economic shocks.

At the moment, liquidity reserves are over 6 billion euro ($6.67 billion), covering the Treasury's funding requirements for five months.

Another possible risk for Romania is the volatility of the national currency but the central bank's international reserves allow leeway for preventing a strong depreciation of the leu beyond a certain normal volatility in this period, covering the total short-term debt, the analyst added.

Socol noted that the Bucharest Stock Exchange, BVB, has not remained indifferent to external shocks. Romania's blue-chip index closed 3.53% down on Brexit uncertainty on Friday, after a 6.12% drop in morning trade.

"Given that interest rates will remain at extremely low levels - as we will definitely see a more aggressive quantitative easing which has positive effects but poses many risks for the European economy - in conjunction with the global risk level, many investors are likely to move toward purchases of gold in order to minimize losses," Socol commented.

In the medium and long term, the biggest risk for the economies of the East European countries, is the materialisation of the idea of "a two-speed Europe", the analyst also said.

Many of the Eastern European countries preparing for advanced integration such as the Czech Republic, Poland and Hungary are already quite sceptical about adopting the euro, although some of them have met the requirements for such a move a long time now.

Brexit was caused by a mix of stammering decision-making in recent years and poor leadership decisions that led to deepening inequalities rather than to a stronger and integrated Europe, she concluded.

The optimistic scenario is for this crisis to turn out to be the impulse that Europe needed to reform, to be united and to realise the risks it is exposed to, but the future depends on many variables and for the time being any scenario is possible, Socol also  said.

($ = 0.8986 euro)
 

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