Romania:Country Report IMF

Romania’s recovery continues, but headwinds from the regional economic downturn and financial turbulence have severely weakened future prospects. Preliminary GDP data for Q3 show a strengthening of the recovery, driven by an exceptional agricultural harvest and continued strong industrial output growth. Domestic demand has begun to recover, with growth turning positive in construction and retail sales bottoming out. The labor market is also beginning to recover, as job growth has turned positive and real wages have started to rise. However, the euro area crisis is likely to sharply slow growth in the coming quarters. The net export contribution to growth has already slipped. International financial market uncertainty has produced a sharp rise in CDS spreads, which will feed through into domestic interest rates, slowing investment and consumption. Inflation has eased considerably, and is now expected to be within the authorities’ end-2011 target range (3 percent ± 1 ppt.). The current account deficit is expec ed to remain below 5 percent of GDP.

Romania has continued its strong performance under the new program. The authorities met all performance criteria and indicative targets for the third review. Performance under the structural benchmarks was more mixed. Benchmarks on bank restructuring legislation and governance legislation for SOEs were met. Those on SOE privatization and a review of the investment portfolio were partially met, but are expected to be completed by the time of the Board meeting.

The authorities are on track to achieve their 2011–12 deficit targets, but steppedup efforts are needed on key structural reforms. The 2011 deficit target of 4.4 percent of GDP (in cash terms) will be met, and underspending should give the authorities resources to help pay down arrears in key sectors (health care and SOEs). The 2012 budget has been prepared with the objective of a cash deficit of 1.9 percent of GDP (2.1 percent of GDP including some off-budget expenditures), lower than strictly necessary to attain their 3 percent of GDP objective in ESA terms with the EU. While the tight expenditure control needed to reach this goal will be challenging, no new major policy changes will be required. A freeze in pensions and wages, together with additional EU support for the investment budget should deliver the needed adjustment. Progress on the ambitious structural reform agenda has been mixed. Governance legislation for SOEs has advanced, but deregulation efforts in the energy sector have lagged. SOE reforms have moved well in some firms, while remaining inadequate in others. The government shows continued commitment to the measures agreed, but political opposition is intensifying as the 2012 elections approach.

Country Report No. 12/11. January 23, 2012

Romania:Country Report IMF

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Romania The challenges to long run fiscal sustainability

Romania, along with many other countries in the European Union, faces daunting fiscal challenges. Fiscal balances deteriorated sharply following the global economic crisis, forcing Romania to implement a fiscal consolidation that was one of the largest in the European Union, but which may not be sustainable without a recovery of economic growth. Although the ratio of public debt to gross domestic product is still relatively modest, at around 35 percent, long-term fiscal solvency is threatened by the costs of funding the public pension system in the face of adverse demographic shifts over the next 50 years. Because of widespread tax evasion, the tax system in Romania is one of the least efficient in the European Union. Tax reforms that can reduce the amount of tax lost to evasion and fraud could make a major contribution to enhancing fiscal sustainability.

Fiscal sustainability has emerged as a key policy issue throughout Europe in recent years, in part because the fiscal positions of many countries on the continent were badly affected by the global financial and economic crisis and also because of an increasing public recognition of the magnitude of the long-term fiscal costs of demographic change, notably aging populations. Several of the new member states of the European Union, including Romania, face major challenges to ensure fiscal sustainability. The sustainability of Romania’s public finances deteriorated sharply in the years leading up to the global economic crisis. The global economic crisis triggered a severe recession in Romania, exposing the fragility of public finances. To bring the fiscal deficit back into line with the targets in the EU’s Stability and Growth Pact, the government implemented a draconian fiscal consolidation in 2010, but it still faces huge long-term fiscal costs as a result of population aging. Long-term fiscal sustainability, along with meeting the fiscal criteria required for membership of the Eurozone monetary union, is also threatened by the poor management of public expenditures.

Maintaining fiscal sustainability should be a priority for policy makers. An unsustainable fiscal position threatens both macroeconomic stability and the financial capacity of the state to deliver essential goods and services to citizens. Moreover, if fiscal positions are perceived to be unsustainable over the long term, the reaction of the markets on which governments finance their borrowing requirements could trigger a fiscal crisis much sooner than might be expected by fiscal planners.

Fiscal sustainability is essentially a forward looking macroeconomic concept which is related to the solvency of government. It is closely linked to the future course of the fiscal deficit and the evolution of public debt and to the government’s capacity to mobilize finance for the deficit and/or to refinance its debt. Alvarado et al. (2004) define a sustainable fiscal policy as a set of fiscal policies which will not lead to the government having, at some point in the future, to default on its debt or to monetize its debt, or be forced to undertake a major fiscal retrenchment to avoid default or monetization.

A starting point for analyzing fiscal sustainability is the current levels and medium-term projections of general government fiscal balances and public debt. It is relatively straightforward to determine the impact of such fiscal balances, if extrapolated forward into the future and combined with some basic macroeconomic projections, on the evolution of public debt levels, with debt sustainability being defined as a situation where public debt as a ratio of GDP is stable or falling and/or does not exceed some critical threshold. Section 2 of this paper examines the general government fiscal balances and public debt levels in Romania and the medium-term projections of these variables. The general government fiscal data include the local governments.

The data captured in the general government budget, however, often provide an incomplete and hence misleading picture of the sustainability of public finances over the long term. This is starkly illustrated by a comparison of current public debt levels with calculations of the long-term net worth of the government in Romania, taking into account the long-term costs of aging. Romania’s outstanding public debt amounted to 32 percent of GDP in 2010, a relatively moderate level. In contrast, Velculescu (2010) estimates the inter-temporal net worth of the Romanian government at negative 252 percent of GDP, based on a finite horizon approach and negative 1,097 percent of GDP based on an infinite horizon approach.

Risks to fiscal sustainability may emanate from activities of the public sector, which are not currently part of the general government budget, but which might eventually impose fiscal liabilities on the budget. These could include contingent liabilities of government, such as loan guarantees, or the quasi fiscal deficits (QFDs) of state owned enterprises. The QFDs of the state owned enterprises are discussed in Section 3.

World Bank. Author: Canagarajah, Sudharshan; Brownbridge, Martin ; Paliu, Anca ; Dumitru, Ionut. Document Date: 2012/01/01. Document Type: Policy Research Working Paper.Report Number: WPS5927.

The challenges to long run fiscal sustainability in Romania

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The Balance of Payments Programme for Romania

MEMO/11/944.Brussels. December 2011. European Commission report concludes balance-of-payments assistance programme remains on track in Romania Today, the European Commission publishes its staff assessment following the latest review of the joint EU-IMF financial assistance programme for Romania, carried out in Bucharest from 25 October to 7 November 2011. The mission concluded that the programme remains on track. The Romanian authorities have made good progress in implementing programme policies under very difficult conditions. Looking forward, prudent macroeconomic policies and accelerated structural reforms are important to ensure strong economic performance and instil market confidence.

After two years of negative growth, real GDP is expected to grow by around 1½-2% in 2011, above previous projections. A further slight acceleration towards 1¾-2¼% is expected for 2012. Inflation has come down sharply this summer - thanks to easing food prices and the base effects linked to last year's VAT hike - to the inflation target range of 3.0% ±1 percentage point defined by the National Bank of Romania (NBR). The current account deficit is projected to remain below 5% of GDP in both 2011 and 2012.

The on-going deterioration in asset quality and increasing loan-loss provisions continue to weigh on the profitability of the banking sector. In spite of tensions in global financial markets and deterioration in the quality of domestic assets, the banking sector has remained resilient with the capitalisation of the banking sector being kept at adequate levels (13.4%).

Public finance developments until the end of September are consistent with meeting the 4.4% of GDP cash deficit target in 2011. For 2012, the Romanian authorities target a 1.9% of GDP cash deficit which should make it possible to comply with the below 3% deficit target (based on the standards of the European System of Accounts, ESA) for 2012, by a comfortable margin.

The Romanian authorities are implementing structural reforms, mainly in the energy and transport sectors, and restructuring state-owned enterprises. This autumn, the Romanian Government appointed a new Minister to be specifically in charge of coordinating EU funds, with a view to make better use of EU funds.

The mission for the next programme review is scheduled for late January - early February 2012.

First Review-Autumn 2011. Directorate-General for Economic and Financial Affairs.

The Balance of Payments Programme for Romania

For information about Projects in Romania see EASTERN EUROPA Projects

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IMF Completes Third Review Under Stand-By Arrangement for Romania

Press Release No.11/475.December 19, 2011.The Executive Board of the International Monetary Fund (IMF) today completed the third review of Romania’s economic performance under a program supported by a 24-month Stand-By Arrangement (SBA). The authorities have indicated that they will continue treating the arrangement as precautionary and therefore do not intend to draw under it.

Completion of the review makes an additional amount equivalent to SDR 430 million (about €507 million, or about US$661 million) available for disbursement, bringing the total resources that are currently available to Romania under the SBA to SDR 1.35 billion (about €1.6 billion, or about US$2.1 billion).

The SBA was approved on March 25, 2011 (see Press Release No 11/101) in the amount of SDR 3.1 billion (about €3.6 billion, or about US$4.7 billion) and came into effect on March 31, 2011.

Following the Executive Board’s discussion on Romania, Mr. David Lipton, First Deputy Managing Director and Acting Chair, said:

“Romania has made good progress under the Fund-supported program. Policy implementation has remained strong and all program targets were met. Economic growth has resumed while inflation has fallen. However, risks have risen considerably due to the financial turbulence in the euro area. Continued commitment to the economic reform agenda is crucial to help withstand current uncertainties.

“The authorities are on track to meet their fiscal targets for 2011, and their 2012 budget should bring the deficit well below 3 percent of GDP next year. Plans to address the chronic financial problems in the health care sector and to improve tax administration are welcome. Further progress is also needed to improve absorption of EU funds. Additional efforts to reform state-owned enterprises, together with enhanced regulation and improved market-oriented pricing, will be essential to reduce arrears, improve economic efficiency, and boost growth.

“Risks in the banking system, arising from difficulties elsewhere in Europe, warrant strong supervisory vigilance. The focus should be on enhanced monitoring and detailed contingency plans—including procedures for using the newly enhanced bank resolution powers—to guard against possible contagion. While inflation has dropped sharply, monetary policy should remain cautious given current uncertainties.”
 

For more information about Projects in Romania see Europe Projects

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Romania Galati SME Energy Efficiency

The EBRD is considering providing a local currency loan of up to RON 55.5 million (EUR 13.2 million equivalent) to SC Apa Canal SA Galati for water and wastewater infrastructure improvements. The financing is a sub-project of the EUR 200 million Framework for Romania EU Cohesion Fund Co-Financing for regionalised water companies (the “Framework”). The project summary document for the Framework was published on 23 September 2010. The proposed project, which is part of a EUR 129.8 million regional investment programme co-financed by significant grant funding from the European Union, the Government of Romania and the local governments under Romania’s Cohesion Fund Programme, will enable the Company to extend and rehabilitate its network in the County of Galati as well as to improve water and wastewater services in five main localities in the County, namely: Galati city, Tecuci, Targu Bujor, Pechea and Liesti.

Investments are expected to significantly reduce water losses, optimise operating costs and expand water supply and wastewater collection and treatment services in Galati County in line with relevant EU directives. The EUR 13.2 million equivalent loan project is a sub-project of the EUR 200 million R2CF Framework (Project ID 41666) approved by the Bank to co-finance projects in Romania’s water and wastewater sector alongside EU Cohesion Funds.

European Bank for Reconstruction and Development. Country:Romania.Project number:42928.Business sector:Municipal and environmental infrastructure.Public/Private:Public date: 29 may 2012. Status: Passed concept review, Pending final review.PSD disclosed: 9 Dec 2011

R2CF Galati sub-project

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Romania ROSEFF SME Energy Efficiency

The EBRD is considering a SME Energy Efficiency Facility of up to EUR 20 million to BRD SocGen (BRD) to be on-lent by BRD to SMEs in Romania. The proceeds of the loan will be used by BRD to provide medium and long-term financing to private companies for projects aiming to save energy. In addition, the EBRD is also considering a Municipality Energy Efficiency Facility of EUR 10 million. Both projects will be implemented under distinct frameworks already made public.

The SME Energy Efficiency Facility will contribute to the transition process by maintaining an essential flow of lending to private enterprises at a time when the availability of credit, particularly to SMEs, has been constrained. Transition impact potential also derives from the demonstration effect associated with the energy savings and will help improvement of costs of the private SME sector.

BRD SocGen, Romania (BRD). As of end-September 2011, BRD’s total assets amounted to EUR 10,579 million and total equity amounted to EUR 1,154 million (RAS). The audited IFRS 2010 net profit was at EUR 240 million. BRD is the second largest Romanian bank, with a 14.05% market share of total banking assets as of end-June 2011.

European Bank for Reconstruction and Development. Country:Romania.Project number:43502.Business sector:Lending to Banks.Public/Private:Private Board date: 28 Feb 2012. Status: Passed concept review, Pending final review.PSD disclosed: 9 Dec 2011

ROSEFF SME Energy Efficiency - BRD

BRD - MEE

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Romania.R2CF Covasna Sub-Project

European Bank for Reconstruction and Development. The EBRD is considering providing a loan of to €7.6 million to S.C. Gospodarie Comunala S.A for water and wastewater infrastructure improvements. The financing is a sub-project of the €200 million Framework for Romania EU Cohesion Fund Co-Financing for regionalised water companies (the “Framework”).

The project will be cofinanced by a regional investment programme of up to of €78.9 million, which will include significant grant funding from the European Union, the Government of Romania and the local governments under Romania’s Cohesion Fund Programme. The investments are expected to significantly reduce water losses, optimise operating costs and expand the water supply and wastewater collection and treatment services in Covasna County, in line with relevant EU directives.

Transition Impact

The sub-project will support environmental improvements as well as the continued regionalisation of water and wastewater services in Covasna County, which will result in efficiency gains as well as the transfer of commercial and managerial skills to less-developed localities in the county. The Company will participate in a benchmarking programme alongside other borrowers under the Framework, which was approved by the Bank to co-finance projects in Romania’s water and wastewater sector alongside EU Cohesion Funds.

The project will also inlcude tariff adjustments to achieve financial and operational sustainability.

In addition, the transition impact potential for this Project will be further enhanced based on the fact that the Company is expanding to smaller and less developed communities, resulting in a greater scope for institutional capacity building.

The Client

S.C. Gospodarie Comunala S.A. (Apa Canal Covasna). EBRD Finance Senior loan of up to €7.6 million. Project Cost Up to €86.5 million. Country: Romania.Project number:42570.Business sector: Municipal and environmental infrastructure.Public/Private: Public.Environmental category: IEE.Board date: Status:Passed concept review, Pending final review.PSD disclosed: 2 Dec 2011

R2CF Covasna Sub-Project.

Romania.Mine Closure, Environmental and Socio-Economic Regeneration Project

The Romania Mine Closure, Environmental and Scio-Economic Regeneration Project aims to strengthen the Government's ability to undertake mining sector reform by: (1) building the capacity of the ministry of economy and commerce for closing uneconomic mining enterprises through support for closing complex mines and ancillary enterprises in an environmentally sustainable manner; and (2) providing support to the National Agency for development and implementation reconstruction programs for the mining regions, local communities, and other agencies for community-based planning and socio-economic regeneration of the mining regions.

The Bank has received a request from the Government of Romania a letter dated November 28, 2011 requesting a six month extension of the project closing date, from November 30, 2011 to May 30, 2012, in order to fully achieve the project development objectives (PDO) and requesting the cancellation of US$31,089,780 out of the loan amount of US$120,000,000.

World Bank.Document Date:  2011/11/29.Document Type:  Project Paper.Report Number:  65814.Volume No:  1 of 2 (See all volumes)

Romania - Mine Closure, Environmental and Socio-Economic Regeneration Project : restructuring (Vol. 1 of 2)

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