The depth of a possible economic recession is influenced mainly by the length of the lockdown period instituted to halt the spread of the coronavirus epidemic – so believes Csaba Bálint, member of the Romanian Central Bank’s council of directors. In an interview given to the transindex.ro news portal, the banker outlined some heavy consequences of the pandemic that are already affecting economies in Europe and worldwide. He also stated his viewpoint on the financial and economic measures needed to keep economies afloat and avoid a downward-spiraling economic crisis. The Romanian Central Bank has already approved some measures considered to be of great importance; these are mostly aimed at solving liquidity and cash-flow problems companies are now facing.
“If we look back to the economic crisis of 2008, or to the recessions of the 20th century, we can state that in those times, the roots of problems were connected mainly to financial systems. Nowadays, we are facing a totally different type of crisis, caused by a pandemic that currently does not have a cure, and there is no vaccine against it. Authorities are unable to provide enough protective suits and masks – not even to those who need these the most; at this moment, the only viable option to stop the spread of the virus and a possible humanitarian crisis is social distancing, drastic limitations on personal contact and meetings,” detailed the banker. “This also means that the economy has to function for about two to four months on a pilot light, so to say. Nevertheless, China’s example shows that the situation can be handled: The epidemic can be curbed and economic activities restarted,” he added.
“The ‘pilot light’ function means at least a 90 percent loss in revenue for tourism and hospitality sectors; then again, it has become a certainty by now that the whole country’s economy will be affected. As far as companies are concerned, their income will diminish considerably during the above mentioned period of 2-4 months, which in turn will lead to liquidity and cash-flow problems. If a company’s revenues are decimated, it cannot pay employees nor the bills,” Bálint explained. “Furthermore, the difficulties of the most vulnerable sectors will most likely spill over to others, to companies which at the time being seem to be holding on. The negative effects then will be noticeable in the country’s budget and the quality of the loan portfolios as well,” the banker stated.
“If society acts in an orderly way, people comply with governmental regulations and respect precautionary measures, and the pandemic is halted in a few months, the economy could experience a take-off after some corresponding economic and monetary policy measures are taken,” he emphasized.
On the other hand, time is precious, and half-measures won’t help: If the pandemic is not stopped soon enough in Europe and the United States, all the negative effects economies experience at this time will both worsen and persist, said the banker. In Romania, the effect of the pandemic will be probably seen in GDP figures for the first quarter of this year, but the significant drop in GDP will be measured most likely in the second quarter. If the pandemic is stopped in time, economic stabilization could begin in the third quarter, and growth could even be achieved in the last part of the year, Bálint believes.
When asked which economic and monetary policies ought to be taken in this situation, the banker said that the most important goal is to help companies with liquidity issues they face, as this helps preserve jobs too. Some steps had already been taken by the state, for instance, widening the circle of beneficiaries for state guarantees. This is important because now a small or medium-sized business can obtain a bank loan more easily then before. The state has also assumed support for those who were sent on forced leave, and the deadline for the payment of some taxes was postponed.
The Romanian Central Bank (BNR) has adopted some “historically important” measures as well, Bálint emphasized. One of these decisions regards the so called repo deals. A repo deal means that a commercial bank can receive monetary funds in RON from the Central Bank for a predetermined period in exchange for the state bonds they hold. This way, monetary funding from the banking system can be channeled towards companies and people.
BNR also decided to buy state bonds in the secondary market, decreasing the prime rate by 50 basis points (to 2 percent), and narrowed the marginal interest rate from +/-1 percent to +/-0.5 percent, which means a reduction of 75 to 100 basis points (0.75-1 percentage points) in inter-bank interest rates. “The central bank cannot finance the state or the private sector directly, but it can provide the resources. Our institution hopes that the banking system is able to effectively channel the financial resources to the population and the public sector,” Bálint stated.
He also noted that the Romanian commercial banking system has a solvency rate above the EU average; the liquidity indicators of its banks are among the best in Europe. Before 2008, the population and companies became indebted quickly to the banks, but this is not the case now. There is sustainable growth in bank loans, and the loan-to-deposit (LtD) ratio is around 70 percent, meaning that for every deposit of RON 100 there is a RON 70 loan. In 2008, for every deposit of RON 100 there was a loan of RON 130, Bálint explained.
“In my opinion, we have to be extra careful in keeping the right balances in Romania. If the state takes on too much of a financial burden, issues can occur in financing the budget deficit; if the banking sector is not attentive enough, the trust in the financial system can be diminished,” emphasized Bálint. “Nevertheless, I am certain that as the sun comes up again in the morning, this crisis will pass, like others have passed before. People should try to do the most they can in their own situation; we can get through this period with minimum damage if we act together in solidarity with each other,” he concluded.
Title image: The pandemic’s effects on the economy can be overcome with correct measures and societal solidarity