Romania monthly economic review January 2009

5 Februarie 2009

ERNST & YOUNG S.R.L.

 

Latest developments

State budget in 2009 - drafted on 2.5% economic growth

The budget bill for 2009 is drafted on the basis of an economic growth up to 2.5%, an average inflation of 5%, a current account deficit of the payment balance at 10.3% and a budgetary deficit of 2% of GDP, as Finance Minister, Gheorghe Pogea, said. The main reasons for the budgetary deficit at 5.2% were the overestimated public revenues, 36% as against 30.9% achieved, which resulted in a gap of more than EUR 7 bn in GDP and a failure in accomplishing the estimation regarding VAT revenues, which were lower by EUR 1.67 bn (1.2% of GDP). The Minister also specified that GDP in current prices will amount, in 2009, to RON 579 bn, considering an exchange rate of RON 4 to EUR 1. The gross average salary will advance this year from RON 1,600 to RON 1,693, and the gross average salary earnings will advance from RON 1,790 to RON 1,820 (plus 5.8%). The Minister added that the number of jobless is also expected to advance from 403,400 to 505,000 persons in 2009. Regarding the budgetary revenues, the Government estimated that they would reach 32.1% of GDP and the investment expenditures will account for 5.6%. “The Government priority, at the beginning of the year, is to make sure that the economy advances through investments, which are expected to account for 5.6% of GDP, but also by settling the invoices issues and not paid on 31 December 2008, which are EUR 2.1 bn worth. The Minister informed that along with the settlement of the invoices, the Government will provide co-financing for attracting the European funds and they will grant a source for the VAT payment, so that company activity is not blocked. The previous Government spent EUR 6.7 bn more than collected, said the Prime Minister, Emil Boc. “Unfortunately, the additional expenditures were not directed to investments, infrastructure works but those additional resources were used for staff expenditures and expenditures for goods and services,” he further explained, adding that the staff expenditures were by 35% higher compared to 2007, and those for goods and services, by 36%. The Prime Minister also specified that major outstanding amounts were noted for bills not cashed. “Money was not paid for the works made in 2008. There are outstanding debts of EUR 1.1 bn just at governmental level,” Boc said. In terms of salary expenditures, those will be considered this year only if they fit the limit of expenditures foreseen in the budget draft, 34.6% of GDP. “The salary increases were not approached in the talks. For the time being, they were approached within the talks regarding the macro-economic framework, the revenues and the deficit. In this context, we shall try to establish these priorities, and if they fit, we shall have them considered, and if they do not fit, I tell you now that they will not be approved,” Pogea explained. He added that the expenditure category included expenditures for investments and those for staff, and he underlined that in Romania the dynamics of staff in the central public administration, local one, agencies, hose subsidies and non subsidized ones, with own revenues, has reached 30.6% of total staff in economy. At the same time, the Finance Minister drew the attention that public revenues would not exceed, in his opinion, 32.1% of GDP, which will result in a budgetary deficit of 3%.

Government includes growth stimulus measures in the budget draft

In the final draft of the budget law for this year, and after last-minute talks with the trade unions, among the key steps taken towards fiscal consolidation, the Government will: i) rise the social security contributions by 3.3% to 32.3%, ii) increase the excise taxes for tobacco, iii) freeze the pensions and wages in the budgetary sector in real terms, iv) cut the wage payroll in the budgetary sector from 8.4% to 7.5% of GDP and v) cut the current expenses with goods and services from 6.5% to 5% of GDP. In order to mitigate the social impact of the economic slowdown, the government will however i) implement gradually a minimum statutory pension of RON 350 (EUR 82) per month ii) help companies that send workers in technical unemployment and iii) increase the public investments in infrastructure to EUR 10 bn or 7% of GDP. Other growth stimulus measures, such as capitalizing CEC and Eximbank state-owned banks, helping the automotive industry and amending certain specifications of the Fiscal Code are also considered. Eximbank, CEC Bank, the Guarantee Fund for Rural Credit, the National Fund for SMEs (FNIMM), as well as the Businessmen's Association of Romania (AOAR), The National Association of Exporters and Importers of Romania (ANEIR) and The National Council of Small and Medium Sized Private Enterprises in Romania (CNIPMMR) concluded a partnership for SME company support in Romania, in the context of the financial crisis. The National Council of Small and Medium Sized Private Enterprises in Romania (CNIPMMR), along with AOAR and ANEIR will represent the interest of the beneficiaries of this agreement. Eximbank and CEC Bank can guarantee at most 80% of the value of medium and long-term funding, given by the 2 banks, including for SMEs participation in projects co-financed from European funds. Eximbank and FNIMM co-guarantee loans aimed at implementation of investment projects and bank guarante letters issued to small and medium-sized enterprises. Eximbank's guaranteed value can be of maximum 50%. Through the agreement, the bank can also guarantee loans for farming projects, of up to 50-80% of the loan's value. Given the outlook in the main economic sectors, preventing GDP contraction (e.g. targeting a small growth in the region of 0.5%) this year would be a much appropriate target for the government under the circumstances of moderate fiscal deficit.

European Commission recommendations for Romania

The effective implementation of the required reforms critically depends on Romania's ability to improve urgently the efficiency and effectiveness of its public administration at both central and local level, by building up effective regulatory control and enforcement capacity, reads the European Commission recommendation following the 2009 update of the broad guidelines for the economic policies of the member states and the Community and on the implementation of member states' employment policies. According to the European Commission, in the current economic context, Romania's first priority should be to tackle macroeconomic and fiscal imbalances that pose risks to the sustainability of its medium to long-term growth path. At the same time, as its cost-advantages are gradually eroding, Romania should speed up structural reforms to transform the economy from one based on cost-advantages to one based more on productivity, innovation and knowledge, tapping into new sources of growth. Brussels points out that Romania has continued the implementation of its National Reform Programme, although progress has been slow. Romania has continued to conduct a loose fiscal policy, which has contributed to macro-economic and fiscal imbalances. It has implemented some measures to improve the quality of education and continued the implementation of its research and development strategy. In order to preserve external competitiveness and to contain the current account deficit and inflation, the EC recommends Romania to significantly tighten fiscal policy and urgently implements a binding medium-term fiscal framework. It also revises the composition of expenditure to increase the share of growth-enhancing spending inter alia by reducing and redirecting state aid to horizontal objectives and keeps wage developments in line with productivity growth. In the context of a coherent better regulation policy, urgently implements measures to substantially reduce administrative procedures and delays in obtaining authorizations, in order to improve the business environment and reduce sources for corruption. At the same time, the European Council argues the Romanian authorities should improve the quality and labor market relevance of the education and training systems, including lifelong learning, reduces early school leaving, and facilitates the transition of young people into employment, including through work-based training. The Commission warns that implementation of the energy and climate change package, agreed by the European Council, will require close attention. The Commission adopted 'country chapters' and recommendations under the Lisbon Growth and Jobs Strategy. These will also help ensure the European Economic Recovery Plan is implemented in a way that builds for the future as well as responds to the economic crisis. The country chapters analyze progress in each European Union member state in implementing the Growth and Jobs Strategy, taking account of the crisis. They include proposals for formal recommendations for endorsement by the Spring European Council. The Commission has also adopted reports on the overall implementation of the Lisbon Strategy in the macro and micro-economic and employment fields.

Romania bets on attracting funds worth EUR 2.42 mn in 2009

Romania bets on attracting European funds worth some EUR 2.42 bn in 2009. The Minister of Public Finance, Gheorghe Pogea, announced that the 2009 budget stands at EUR 51.16 (35.3% of the GDP), out of which 31.63% of the GDP represent revenues from domestic sources, 0.79% of the GDP represent preaccession funds and 0.88% of the GDP represent post-accession funds, with a deficit of 2% of the GDP that needs to be financed. With a gross domestic product estimated at EUR 144.7 bn, the pre-accession funds the government relies on this year stand at EUR 1.143 bn, with the post-accession funds standing at EUR 1.27336 bn. Romania has attracted post-accession funds worth no more than EUR 203 mn in the 2 years since it became member of the European Union, although it had EUR 3.1 bn at its disposal, the Minister of Public Finance said.

Over 400 SAPARD projects in Romania still benefit from EU funds

Over 400 Special Accession Programme for Agriculture and Rural Development (SAPARD) projects, estimated at EUR 90 mn, will still benefit from European Union funds and beneficiaries have until late September 2009 to submit reimbursement applications, Romania’s Payment Agency for Rural Development and Fishing (APDRP), which manages SAPARD funds, confirmed. The SAPARD program should have been completed at the end of 2008, but the European Commission adopted a decision on 2 December 2008 allowing both Bulgaria and Romania to extend the deadline for payment of SAPARD funds by one year, from 31 December 2008 to 31 December 2009.The extension of the deadline will give the Bulgarian and Romanian authorities extra time to ensure all problems are properly addressed before final payments are made. In regards the EU subsidies for agriculture, Romanian farmers receive EUR 110/ha in 2009, while the average amount in the other EU countries is EUR 250/ha. Producers received EUR 47/ha in 2008 from European funds and EUR 50 from the national budget. Subsidies on farm land will go up to EUR 49/ha, by an average 5% per year, and the complementary payment from the national budget will amount to EUR 60/ha. Central bank projects 8% GDP growth this year.

Romania's business sentiment remains mostly negative in January

Romanian managers remain mostly negative about the performance of the country's economy in the 3 months through March, with expectations for stabilization in the retail and services sectors, the National Institute of Statistics (INS) said. Managers in the industrial sector expect a decrease in output due to reduced number of orders and contracts over the past 3 months. Managers also expect job cuts and prices are seen slightly rising. Managers of construction companies project further output cuts, whereas property prices are expected to also rise. In the retail sector sales and employment figures are expected to remain unchanged. Prices, however, are seen going up in the 3 months through March. In the services sector managers are expecting steady demand through March. For its January survey Romania's statistics board interviewed managers in a total of 7,843 companies in the four sectors.

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