Romania monthly economic review

3 Aprilie 2009

ERNST & YOUNG S.R.L.

 

Latest developments

Foreign loan: Romania borrows EUR 19.95 bn

Romania agreed over a 2 years stand-by agreement with IMF for the amount of EUR 12.95 bn. The total foreign funding package from the Fund, the European Union, WB and EBRD will rise to EUR 19.95 bn. The Romanian authorities agreed with the IMF representatives that the amount of the stand-by agreement will be EUR 12.95 bn, in order to avoid the figure 13 deemed unlucky. The foreign assistance programme will be discussed by the IMF Executive Committee from Washington in the coming weeks, the first installment of EUR 5 bn being available right away after approval. The European Union will contribute with EUR 5 bn after the favorable assent of the European Commission and the European Council. The World Bank will put EUR 1 bn at the disposal of Romania, while EBRD together with other international financial institutions will grant EUR 1 bn. According to an IMF press release, the objective of the programme is to improve the effects of the strong fall of the flows of private capital to Romania and, also, to implement the economic policy measures required to reduce the fiscal imbalances and to consolidate the financial system. The IMF delegation has met in Vienna with the main foreign banks which operate in Romania, in order to request them to not withdraw money from the country. According to IMF representatives, the Government must take immediate measures to reduce the budgetary deficit. The fiscal measures that have to be taken by the Government will focus on the reduction of the short term deficit, in order to bring it to a level can be covered from internal resources and from the money coming from foreign resources, and a resort to structural reforms, in order to keep the deficit at a low level also after the end of the global financial crisis. Moreover, the IMF representatives stressed that the Executive must revise the salary and pension system, with foreign assistance. The salaries in the public system have doubled in a period of 3 years. This growth trend is not sustainable and creates a huge pressure on the budget. It is necessary to proceed to a reform of the structure of the public salary system which does not necessarily mean that the revenues of the employees will be cut. The system according to which the salaries are established must be simplified and the salary system that will be applied will rely less on bonuses, which should not exceed 25% of the salary. The inflation rate should also return until the end of the year in the target of the National Bank of Romania.  The inflation target for 2009 is 3.5%, with a variation interval of 1%, objective that BNR will propose to the Government also for 2010. The loan granted by IMF to Romania will have an interest rate or around 3.5% per year. The assistance of EUR 1 bn from the World Bank will be granted in the form of a range of Loans for Development Policies which will be released in a period of 24 months. The first installment of the loan of EUR 5 bn granted by the European Commission will arrive in Romania in early July, the interest rate being calculated subject to Euribor rate plus a few basic points. EBRD will contribute to the foreign funding package of EUR 20 bn coordinated by IMF through the EUR 500 mn - EUR 1 bn increase of the investments in Romania in the next 2 years, half of the amount going to banks, and the balance to the economy, companies, energy and infrastructure included.

The budget deficit in the first 2 months is 0.63% of GDP

The budget deficit on the first 2 months in 2009 accounted for 0.63% of the Gross Domestic Product (GDP), according to the Minister of Public Finance. Over the reference period, budget revenues dropped 6.8% (RON 1.88 bn) compared to the first 2 months in 2008, whereas public spending jumped 10.1%. Receipts derived from profit tax slumped 13.4%, VAT derived revenues dropped 7.6%, whereas receipts from salary and income tax showed a rise from January-February 2008. According to the Finance Minister, over the examined period, spending related to loan interest rates rose, as well as the spending on treasury bills issuance and on social assistance. Personnel spending showed an advance of 2.8% from the same period last year. For 2009, the budget deficit was revised to 4.6% of the GDP, and for 2010 it is estimated at 3.7% of the GDP, going to drop below 3% of the GDP in 2011, in agreement with the EU convergence criteria.

Inflation of 0.88% in February 2009

Inflation in February was 0.88% compared to the previous month and the annual inflation rate (February 2008 - February 2009) went up to 6.89%, according to data released by the National Institute of Statistics (INS). The 2008 annual inflation rate was 6.3%. The average monthly inflation rate was 1.1% in February 2009, compared to 0.8% in February 2008. Compared to January 2009, food product prices were up 0.32%, non-food product prices 1.31%, and service rates 1.03%. Compared to February 2008, food was 5.87% more expensive, service rates went up 9.48% and non-food prices rose by 6.68%. The overall average price growth in the last 12 months (March 2008 -  February 2009) compared to the previous 12 months (March 2007 - February 2008) calculated based on the Consumer Prices Index (CPI) was by 7.7% and the one calculated based on the Harmonized Index of Consumer Prices (HICP) was by 7.8%. On the other hand, overall (local and foreign markets) industry turnover dropped by 17.6% in January 2009 compared to the previous month because of the reduction of the processing industry by 18.2% and of the extracting industry by 7.5%, according to INS. As far as the large industrial groups are concerned, turnover has been diminished in all sectors. Turnover of the long life cycle goods processing industry dropped by 30.4%, of the capital goods industry by 26.6%, in the fast moving consumer goods industry by 20.1%, in the intermediate goods industry by 10.1% and in the energy industry by 0.9%. Also, in January, new orders received by the industry including both the local and the international market decreased by 14.5% in nominal terms compared to the previous month and by 34.5% compared to the corresponding month of 2008.

PPI inflation decelerates to 7% y/y in January 2009

The industrial production price index increased by 7% y/y, the annualized PPI inflation having decelerated from 7.9% y/y one month earlier and 20% y/y in July-August last year, as an effect of lowering commodities prices. The disinflation trend, also supported by the demand-side factors both abroad and at home, is however threatened by the local currency’s depreciation as the euro valued in January 15% more than one year earlier (nominally) thus generating significant inflationary pressures on both PPI and CPI. The concerns about rising inflation have occurred recently, in spite of the opposite demand-side drivers and against the global disinflation trend, as i) the local currency depreciated significantly amid BoP risks and ii) the Central Bank entered a strategy of indirect budget deficit financing. Non-governmental credit advances 4.2% in January.

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