Weekly Financial - September 17th

20 Septembrie 2010

BANCA COMERCIALĂ ROMÂNĂ S.A.

 

News

Pension reform legislation passes through Parliament

This week, the lower house of the Romanian Parliament passed a bill that reforms the public pension system according to the requirements of the IMF and EU under the 24-month stand-by arrangement. The initial deadline for approving the new legislation for the public pension system was June 2010, but it was missed and reset to September. The Social Democrats and Liberals left the meeting room before the vote in protest of the non-adoption of their initiative regarding an increase in pensions. As a result, the government managed to pass the reform legislation largely unchanged from the initial draft.

Under the new legal framework, the retirement age will rise to 65 by 2030 for both men and women. Present levels are 58 years for women and 63 for men. All pensions will be indexed to inflation, rather than to average wages, which will save money in the public sector in the long run. Special pensions currently received by former employees of the army, police, the Ministry of Foreign Affairs, courts and pilots will be gradually eliminated. These are very high pensions that usually amount to 80% of the last salary in the month prior to the retirement. They are not based on the contributiveness principle to the public pension system over a long period of time and they have encouraged some controversial practices of artificially ballooning the last salary gain before retirement via the inclusion of different bonuses. Some provisions of the new legislation have a short-term impact, like the tightening of the disability pension procedures.

The reform of the public pension system should reverse, at least partially, the fiscal effects of the Constitutional Court's decision to reject a 15% cut in pensions. If adopted, the measure proposed by the government at that time would have put pensions back at the 2008 level. At the same time, these reforms should deal with the pressing problem of an ageing population. Along with rising unemployment in the midst of the economic recession, this has resulted in a higher number of pensioners compared to employees in recent years.

Romania to keep flat income tax unchanged at 16% until at least 2013

During its weekly meeting, the government approved the fiscal strategy for 2011-13, according to which the flat tax on personal income and profit will be maintained unchanged at 16% in the coming years. The document will be sent to the Parliament and then will be discussed with the IMF on the occasion of the next review of the current 24- month stand-by arrangement. The government expressed its commitment to reducing the budget deficit to 6.8% of GDP in 2010, 4.4% in 2011, 3% in 2012 and 2.5% in 2013 (cash standards). Personnel expenditures will be cut from more than 8% of GDP in 2010 to 7.4% in 2011. A better absorption of European funds is a top priority for the next year and public expenditures related to the co-financing of EU funds will double to 2% of GDP.

A news agency obtained more details about the government strategy and reported that any future salary increase in the public sector is conditional upon additional layoffs. There are also some rumors in the media, according to which the government has already discussed the introduction of a wealth tax, following the proposal of a small political party within the ruling coalition. According to this proposal, a 1% tax per year could be levied on personal wealth in excess of EUR 450,000 over the next three years. Some estimates put total amounts raised at EUR 9bn, while their destination could be the payment of pensions. We await further official details before assessing the viability of such a decision in the current economic environment.

Yields flat on primary market

This week the MinFin sold 1Y T-bills worth RON 372mn at 7%, unchanged compared to the previous auction in August. Initial plans were to sell RON 1bn of T-bills and investors placed total bids worth RON 1.8bn. In a separate auction, the MinFin managed to sell 10Y bonds worth RON 200mn at 7.1%.

The MinFin is currently in a rather comfortable position, as the austerity measures implemented this summer seem to be bearing fruit. VAT revenues jumped 50% y/y in August, following the 5pp hike in VAT to 24%. Revenues from corporate income tax have also increased, while, unsurprisingly, those from personal income tax fell, after public wages were cut by 25%. An EU official cited by Reuters said that the EU has launched a bond issue to fund the disbursement of another installment of EUR 1.2bn to Romania as part of the 24-month financial arrangement between Romania, the IMF, EU and other international financial institutions. The 7-year bond is guaranteed by all 27 EU member states and enables Romania to take advantage of the excellent credit rating of the EU and finance its budget deficit at lower costs. We stick to our forecast of 5Y government yields at 7% next March.

 

FX Market

 

Money market & Fixed Income

Auction schedule for government debt in September 2010

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