Romania monthly economic review - February 2009

2 Martie 2009

ERNST & YOUNG S.R.L.

 

Latest developments

Romanian Parliament passed the state budget for 2009

The Romanian Parliament passed on 21 February the budget law for 2009 put forward by the Government. The 2009 Budget provides for revenues of RON 75.7 bn (13.07% of the GDP) and spending of RON 94.5 bn (16.32% of the GDP), and a deficit of RON 18.819 bn (nearly EUR 4.7 bn for an average exchange rate of RON 4 to the EUR). Government's fiscal revenues are projected at RON 64.8 bn, of which RON 19.93 bn to be raised in profit, income and capital gains taxes, and RON 44.41 bn in value-added tax (VAT) revenues. The 2009 Budget has been built on an estimated GDP of RON 579 bn, up 2.5% from 2008, an inflation of 5% and an average exchange rate of RON 4 to the EUR. The aggregate budgetary deficit is put at RON 11.78 bn, or 2% of the GDP. Public debt servicing will be EUR 4.7 bn up from 2008 because of a surge in short-term debt as a result of the issuing of treasury certificates and the intention to preserve a large weight of such instruments in the deficit financing in 2009. The current account deficit is expected to reach nearly EUR 14.8 bn, or 10.3% of the GDP. The average number of employed people is projected to continue on a rising trend, yet at a smaller pace than in the previous years, expected to stand at 0.4% (plus 20,000 people), while unemployment should reach 5.5% (up 1.1% from 2008). A moderate increase in the average gross pay to RON 1,820 is also included in the Budget, which means a 6.3% rise. The average gross pay is estimated to reach RON 1,693.

The effects of the new budget will be seen in the economy in the next 3-4 months

The Finance Minister, Gheorghe Pogea, stated that the effects of the new budget on the economy will be seen over 3-4 months and will depend on the stage of development of the projects requiring money for investment. An immediate effect of the new draft budget is the introduction of the minimum guaranteed social pension which will be followed by the capitalization of CEC Bank over the Q1 and the VAT compensation for economic agencies. After the adoption of the budget for 2009 in the Parliament, the Government will decide on the loans to be made for the financing of the budgetary deficit of this year, estimated at EUR 2.88 bn (2% of GDP). The Finance Minister mentioned that his interest is twice higher for loans from a foreign market to restructure the public debt in the sense of the long-term loan increase against the short-term one. At the same time, foreign loans have smaller interest than the domestic market ones. At present, there are pressures connected to the reduction of liquidity on the Romanian market because our country is facing a diminution of financing resources coming from abroad. During budget discussions in the parliament, Pogea said that GDP may increase this year by less than 2.5%, which is the rate set by the National Forecast Commission (CNP). The growth might not exceed 1% in Q1- this being he result of steeper than expected slowdown experienced by the EU economy. Nonetheless, the Government is ready to compensate the private sector’s slowdown by increasing the public investments to EUR 10 bn (7% of GDP) this year.

Local taxes could grow by 20.49% in 2010

Local taxes could grow by 20.49% in 2010, according to new provisions proposed for the Fiscal Code which at the same time might decide taxes on commercial areas and natural persons the same as companies, according to a representative from the Department Head for Laws on Local Taxes of the Finance Ministry. Taxes for houses, cars or land applied by local authorities could grow by 20.49% as these taxes must be recalculated according to the evolution of inflation of the last 3 years. He pointed out that the value of houses could grow from RON 689/sqm at present to RON 830/sqm. At the same time, a new provision for the Fiscal Code could apply taxes on commercial areas held by natural persons. So the value could grow from RON 689/sqm to RON 2,000/sqm and the tax will represent between 0,25% and 1.5% of the resulting value, according to the decision of local authorities. We will take into consideration the owner’s declaration to establish the category of the building according to its destination for commercial area or housing.

IMF says Romania might record economic drop in 2009

The International Monetary Fund (IMF) cautioned that Romania might record a drop in its gross domestic product (GDP) in 2009, with a moderate upturn likely to take place only towards year-end or the beginning of 2010. However, uncertainties over such projection are high. The IMF firmly backs the Government's goal of narrowing the budget gap to 2% of GDP, but it believes the 2009 budget is based on optimistic assumptions with respect to the economic growth and tax collection. The Fund backs the National Bank of Romania's (BNR) plans to focus on attaining the inflation target, after however the target was again missed in 2008, partly due to the expansionary tax policy and the rise in the prices for energy and goods at the beginning of last year. The IMF believes the BNR has little space for maneuver in order to relax the money policy until the implementation of a credible macroeconomic policy package, for stabilizing the economy and cutting the budget deficit. Even so, the BNR would have to gradually relax the money policy, the IMF experts say. The international lender believes Romania is being increasingly affected by the global recession. While economic growth has remained high in the first Q3 of 2008, the production indicators deteriorated fast in the last months of last year. Exports have begun dropping, the financing availability for firms and population dropped down and domestic consumption and investment diminished. Also, industrial output is falling and the confidence of the consumers and business climate has deteriorated. The international problems put pressure on economic growth, while on a domestic level the Romanian economy's imbalances are worsening their effects. According to the IMF, the balance of payments and budget deficit have increased the vulnerability to outer shocks, while the sluggish structural reforms have affected the capacity of the economy to respond to unfavorable conditions. Governmental spending doubled during 2005-2008 and public sector salaries nearly tripled in the last 3 years.

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