REGIONAL COOPERATION AND ECONOMIC INTEGRATION

PART V:
Figure 4: Balance of payments components (% of GDP)
20
15
10
5
0
-5
-10
-15
2002 2003 2004 2005 2006 2007
CA deficit FDI Portfolio investement Other investment
Source: National Bank of Romania, Annual Reports 2003-2007
The increasing importance of FDI intra-company loans and other investment has resulted
in a steady increase in external debt from 30% of GDP in 2000 to 52% of GDP in August
2008. The domestic counterpart of rapidly increasing external debt has been the acceleration
of bank lending to households and enterprises.
This was the economic situation of Romania when the international financial crisis
appeared. One of the major factors with influence on the FDI is the international crisis. It
should be taken into consideration that there are both direct and indirect effects of the crisis
(Isarescu, 2008):
a) Direct effects from banks’ exposure to “toxic assets”. But the direct effects are not present
in the case of Romania because the banking system is fundamentally sound, which means:
lack of exposure to “toxic assets” which lie at the root of the crisis; traditional banking
products dominant due to their high profitability;
b) Indirect effects caused by changes in the availability of capital and liquidity conditions
and which are significant in Romania, as follows:
- availability and cost constraints of external financing because the major impact on
the availability of foreign-exchange denominated credit;
- decline in the volume of FDI inflows,
- negative impact on foreign demand, affecting Romania’s exports;
- increased exchange-rate volatility amid the significant decrease in investors’
appetite for risk on emerging markets.
The slowdown in the growth of domestic credit brings a slowdown in consumption and
investment and the growth slowdown in the Western Europe will affect Romania’s exports
and foreign direct investment (FDI).
Also, a rise in unemployment will follow and inflationary pressures are not likely to
subside because the excess demand in personal incomes. In absence of corrective action,
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