Romania could increase GDP by about 10% by 2050 by increasing savings and redirecting them to productive investment

According to an analysis by McKinsey & Company, Romania could increase its GDP by 10% by 2050 – an additional contribution of 575 billion. This analysis was carried out against the background that a significant part of the population struggles to save and understand basic money concepts , both due to low incomes and a lack of financial literacy, a survey conducted by McKinsey earlier this year showed.

Between 2000 and 2020, Romanians’ disposable income per capita grew by 10% annually, the highest growth in Europe over that period. This allowed Romania to move closer to the more advanced Central European countries and close the gap in per capita disposable income from 60% in 2000 to 15% in 2020.

The average value of financial assets per capita in Romania is around $5,000

Still, compared to other Central and Western European countries, Romania has one of the lowest levels of personal financial wealth at 36% of GDP – almost half the Central European average, according to McKinsey & Company. The average value of financial assets per capita in Romania is about $5,000 while in Hungary, for example, it is $12,000. Personal financial assets are based on personal financial assets, including cash, giro deposits, investment deposits, securities and derivatives, investment funds, life insurance and the 2nd and 3rd pillars.

According to the Romanian National Bank, the net wealth of the Romanian population has increased more than eightfold over the past two decades. As a result, Romanian citizens have little savings, few financial assets, and a significant portion of accumulated wealth invested in real estate. The fact that the savings of the Romanians are still low is partly due to the low income – at least for a large part of the population – as well as a lack of financial education and thus long-term planning. In this context, financial institutions, government and consumers must join forces to find ways to improve financial literacy, offer products or services that meet consumers’ needs, and ultimately build a culture of financial responsibility and awareness, to increase personal and collective wealth. This is a clear case of balancing individual interests with collective ones,” he says Alexander PhilipManaging Partner McKinsey & Company Bucharest.

Romanians still prefer cash and deposits

When it comes to saving, Romanians prefer to keep their money in cash and deposits and avoid sophisticated investment products such as mutual funds, securities and derivatives. Approximately 70% of personal financial wealth is held in cash and deposits, compared to 59% in Central Europe and 40% in Western Europe.

Almost 63% of Romanians say they manage to save occasionally or monthly, based on a survey conducted by McKinsey&Company earlier this year. The survey measured Romanians’ attitudes towards money, savings and financial planning, and was aimed at urban populations at different levels of education, ranging from 18 to 65 years old.

Those who save each month but not a fixed amount (about 1/3 of respondents) are more likely to live in medium-sized cities and have higher education. Worryingly, from a social cohesion perspective, only a quarter of the less educated can save. The younger respondents are equally challenged to make financial investments. Almost a third of the 18 to 24 year olds surveyed are still financially dependent.

90% of respondents expect their pension will not be enough to maintain their lifestyle after retirement

The survey shows that Romanians generally lack confidence in both public and private pension systems. Only one in five Romanians trusts the state pension system and only one in four the privately managed one. Additionally, ~80% of respondents could not estimate the value of the pension they will receive from the state and 90% expect their pension will not be enough to sustain their lifestyle after retirement. Surprisingly, despite the latter number, only 28% of Romanians say they plan their retirement proactively.

The pandemic has raised consumer awareness of the importance of saving around the world, including in Romania. But this trend seems difficult to sustain as spending restrictions have eased and high inflation has started to hurt purchasing power.

Only 1/4 of Romanians maintained their pandemic-related savings

Currently, only one in four Romanians say they have managed to keep up with their pandemic-related savings, the survey shows. This situation is caused by the lack of funds, financial education and support in saving. Only 15% of respondents said they attended financial education programs, and less than 30% said their family taught them how to invest. Although many Romanians would like to save more, they hesitate when it comes to financial planning. In fact something about it 50% of respondents said they would prefer an annual check-up with a dentist to attending a free meeting with a financial advisor. On the other hand, nearly 40% of respondents struggle with basic money management concepts, such as understanding the impact of inflation on their savings.

When it comes to investing, Romanians choose the extreme options: either low-risk or speculative investments

This lack of trust in financial advice and the low level of financial literacy also affect Romanians’ investment decisions. The survey found that respondents prefer either low-risk, low-return investments such as foreign currencies (around 32% of respondents), time deposits (28% of respondents), real estate (24% of respondents), or speculative investments such as cryptocurrencies (e.g. Bitcoin, Ethereum, etc.) (24%)

At the same time, 75 percent of those surveyed stated that they managed their systems themselves. Only one in five respondents believe banks offer reliable financial advice, and a similar percentage check with their bank when making a money-related decision. Family and friends are considered a more credible source of information regarding money management than financial institutions or experts.

Around two thirds of those surveyed would like the state to be more involved in supporting the population in saving or investing through incentives. At the same time, 60% believed that banks or insurance companies should also do more to help people save by offering advice and offering products that are better tailored to customers’ needs. Finally, Romanians also believe that families should play a more important role in their children’s financial education and that the school system should also help in this regard.

“Romanians could build on the pandemic trend towards increased savings and use the general increase in wealth to build individual and collective financial security. Large-scale change may not happen any time soon, as low income and high debt result in low savings rates for a large part of the population. But greater financial awareness and access to reliable information can overcome broader attitudes and behaviors such as risk aversion and distrust of financial institutions. By increasing savings and redirecting them to productive investment, Romania has the opportunity to increase GDP by another 10 percent by 2050. This would increase individuals’ net worth and have a positive impact on the labor market, productivity and innovation. Such an approach would undoubtedly be a passport to greater prosperity for future generations,” he adds Alexander Philip.

The full report is available here.

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