Romania
Second Review under the Stand-By Arrangement and Request for Modification of Performance Criteria-Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Romania.
Author:
International Monetary Fund
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Publication Date:
05 Oct 2011
eISBN:
9781463921910
Language:
English
Keywords:
ISCR; CR; EU funds; authority; government; Romania's capacity; current account; trade balance; return on equity; short-term debt; debt ratio; Fiscal stance; Europe; SOE arrears
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Although the economic growth of Romania has resumed, it has boosted downside risks. However, the country has continued its strong performance under the new program in strengthening macroeconomic policies, accelerating structural reforms, and consolidating economic development. In conclusion, the authorities concur that the current precautionary Stand-By Arrangement (SBA) will provide additional security against unforeseen shocks, thereby setting the stage for strong and sustainable economic development while maintaining external and internal stability and thereby achieving the fiscal goals for 2012.

Abstract

Although the economic growth of Romania has resumed, it has boosted downside risks. However, the country has continued its strong performance under the new program in strengthening macroeconomic policies, accelerating structural reforms, and consolidating economic development. In conclusion, the authorities concur that the current precautionary Stand-By Arrangement (SBA) will provide additional security against unforeseen shocks, thereby setting the stage for strong and sustainable economic development while maintaining external and internal stability and thereby achieving the fiscal goals for 2012.

I. Introduction and Summary

1. Economic growth has resumed, but risks have risen. GDP growth has weakened in Q2, but a good harvest is expected to contribute to a rise of 1½ percent for 2011 as a whole. In 2012, growth is expected to accelerate to 3½–4 percent. However, recent developments in Europe have boosted downside risks. CDS spreads have widened sharply, the leu has lost gains experienced earlier in the year, and banking sector risks have heightened due to stresses in the euro area periphery. Inflation dropped sharply in June-July, but is still expected to remain above the central bank’s inflation target (3 percent ± 1 ppt.) in 2011 before returning to the target range in 2012. Strong export performance is expected to stabilize the current account deficit below 5 percent in 2011–12.

2. Romania has continued its strong performance under the new program. The authorities met all performance criteria for the second review, and met all indicative targets except that on SOE arrears. The structural benchmark on SOEs reforms has been partially met, and the remaining actions are expected to be completed by the time of the board meeting. The structural benchmark on eliminating the legal basis for the stimulente funds is also slated for completion by the time of the board meeting. The benchmark on SOE governance reform legislation has been postponed to October 31, to allow proper preparation time.

3. Implementing the ambitious structural reform agenda and achieving the fiscal goals for 2012 will be challenging. Fiscal performance is on track to meet the 2011 deficit target, and the authorities’ current plans for 2012 could deliver a deficit of under 3 percent of GDP in cash terms. However, reaching the authorities commitment to the EU of under 3 percent of GDP in accrual (ESA) terms will require additional adjustment of at least ½ percent of GDP to cover the inclusion by Eurostat of additional entities into the general government, as well as the traditional gap between cash and accrual totals. Such measures would have to be identified in a follow-up mission. The authorities are moving forward with plans to improve the governance and regulation of SOEs in the energy and transport sectors, as well as plans for restructuring and/or privatization of key firms. However, these reforms are both technically demanding and politically difficult, with political constraints likely to intensify as the 2012 elections approach.

II. Macroeconomic Developments and Outlook

A. Recent Developments

4. Growth has returned to Romania, but the recovery remains fragile. The country posted its third consecutive quarter of positive growth in Q2, although the pace weakened to 0.2 percent (q/q). Domestic demand began to recover, while net exports turned slightly negative. High frequency indicators suggest weaker growth in industrial production and exports. Consumer confidence, however, continues to improve while the monthly decline in retail sales has started to reverse, as has the construction sector. Furthermore, an excellent agricultural harvest should boost growth. Job losses have halted, and registered unemployment rate continued to fall to 4.8 percent in July; however, the more representative ILO measure showed a rate of 7.3 percent in July.

A01ufig01

Private Consumption and Retail Trade

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: Haver; and IMF staff estimates.

5. Inflationary pressures have fallen sharply. CPI inflation dropped to 4.9 percent in July from its peak of 8.5 percent in May, reflecting a large decline in food prices and the elimination of the 2010 VAT increase from the 12-month index. Core inflation1 also fell to 3.1 percent (from 3.6 percent). With the labor market gradually stabilizing, wages are starting to rise in nominal terms, but real wages and unit labor costs are still declining.

A01ufig02

GDP and Economic Sentiment Indicator

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: Haver: and IMF staff estimates.

6. Since June, financial markets have displayed some nervousness regarding spillover effects from the difficulties elsewhere in Europe. Between January and May, the sovereign CDS spread narrowed by around 60 basis points and Romanian equity markets gained more than 5½ percent. Portfolio inflows rose, and the authorities also successfully launched a euro medium-term note issue in June for €1.5 billion, which was well-subscribed. They also continued to build the domestic yield curve, with successful treasury bond auctions out to 10 years maturity at reasonable interest rates. In July, Fitch upgraded Romania’s long term foreign currency rating to investment grade. The leu also appreciated somewhat by 3 percent against the euro. However, these gains have been reversed since early June, as CDS spreads have risen by some 90 basis points and the lei has given back its gains. International reserves at end-July 2011 remained comfortable at nearly 35 billion euros, covering short-term debt at residual maturity.

A01ufig03

Inflation

(year-on-year, percent)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: European Commission; Haver: and staff estimates.1/ Price trends over next 12 months.
A01ufig04

National Currency per Euro

(July 1, 2008 = 100)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: Haver; Bloomberg; and IMF staff estimates.
A01ufig05

CDS, 5-years

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

7. Romania’s external position continues to improve. The current account deficit improved from 13.4 percent of GDP in 2007 to 4.1 percent of GDP in 2010, driven by a strong shrinking trade deficit. Exports are booming with the recovery in major trading partners while subdued domestic demand continues to limit import growth. In the first half of the year, the trade deficit was down by 22 percent, and the current account deficit by 29 percent from the previous year. The trade balance continued to improve fueled by strong exports, particularly in the machinery and automotive sectors. With the help of the current transfers to the public sector, mainly due to disbursements from EU funds approved in 2010, the current account dropped to around 3 percent of GDP on a 12-month rolling basis through June.

A01ufig06

Exports (SA), Imports (SA), Trade Balance 12m

(billion Euros)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver.

B. Macroeconomic Outlook and Risks

8. The baseline macroeconomic outlook remains favorable in 2011-12, but risks have risen sharply.

  • Growth is expected to reach 1½ percent in 2011, initially led by exports, with domestic demand recovering gradually in the second half of the year, reflecting good agricultural output and a recovery in the labor market. In 2012, growth is expected to accelerate to 3½–4 percent in 2012, with the recovery shifting from external to domestic demand as consumption recovers and investment increases with rising EU funds absorption. Increased investor confidence, coupled with planned privatization under the program, are expected to bring renewed FDI and capital inflows. Staff’s baseline projection is for growth to remain somewhat above the 3–3½ percent estimated increase in potential output in 2013–16, allowing for the output gap to close by 2016.

  • Headline CPI inflation is expected to recede to around 5 percent2 by the end of 2011, as the effects of the July 2010 VAT increase drop out, partly offset by increases in administered prices. High world food and energy prices left inflation well above the previously forecast path, triggering consultation with staff under the inflation consultation mechanism of the Fund program in this review; however, the danger of breaching the limit in future reviews has eased. For 2012, a further disinflation towards the central bank’s target (3 percent +1 ppt.) is expected as these supply side shocks wear off.

  • The current account deficit is projected to stabilize at below 5 percent of GDP in 2011–12. In line with recent strong growth in exports, the trade balance will improve in 2011, partly offset by repatriation of profits. Remittances are not expected to grow due to continued slack in host economies, such as Spain and Italy. Private capital inflows are expected to improve over the program period, with FDI rebounding from recession lows accompanied with strong public and private portfolio inflows. Under staff’s baseline scenario, no new financing gap is envisaged, consistent with the program’s precautionary nature.

A01ufig07

Inflation Targets and Outcomes

(in percent)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver; staff estimates.

9. Risks to growth have tilted to the downside since the last review, while upside risks dominate on the inflation front. Increased turbulence in world markets and signs of lower growth elsewhere in Europe have sharply increased downside risks. Romania is vulnerable both to a decline in demand for its exports and to financial market uncertainties, particularly from Greece, which could prompt capital outflows or spillover into the Romanian financial system. Strong capital buffers in banks, tight banking supervision, and healthy NBR reserves provide some cushion against these risks. Domestic political tensions and looming elections could also lead to policy reversals, dampening confidence. On the upside, more rapid implementation of structural reforms and faster absorption of EU-funded projects could catalyze faster economic growth and stronger capital inflows. Inflation risks are somewhat tilted to the upside. Further adjustment in administered prices, public wage increases and their knock-on effects could boost inflationary pressures. Underlying inflationary pressures are, however, mitigated by the still large output gap and a bumper harvest.

III. Policy Discussions

A. Fiscal Policies

10. The authorities remain on track to meet their 2011 cash deficit target of 4.4 percent of GDP. The end-June overall balance and primary spending targets were both met by a comfortable margin (0.4 and 0.3 percent of GDP, respectively). Tax revenues have been higher than anticipated, while both current and capital expenditure have been lower, producing a much smaller deficit. Personnel expenditure has been below projections due to a sharper-than-expected reduction in public employment. Capital spending has also fallen significantly short of forecasts, with EU structural funds projects continuing to underperform.

Fiscal Performance, Second Quarter, 2011

(billions, RON)

article image
Source: Romanian authorities; and staff projections.

11. The budget supplement adopted in August slightly raises spending in 2011. The revenue forecast has been revised upward by 0.2 percent of GDP, reflecting improved tax collection performance (particularly in excise taxes). The authorities intend to use the extra revenue to provide for a higher-than-expected number of pensioners, and to cover unpaid bills and additional expenditure pressure in the health sector. Additional allocations to the health sector will be strictly tied to the adoption of healthcare reforms to avoid recurring arrears pressure in the future (¶16). If lower public employment creates sufficient space, the authorities may consider a modest wage increase later in the year, while remaining within their original wage bill limit. In the context of the SOE reform program, the budget supplement also allocates, in the form of transfers, 0.3 percent of GDP to the reduction of SOE arrears to be used to catalyze a much larger reduction in overall SOE arrears via cancellation schemes; however, these plans are expected to be budget-neutral, as they will be offset by the recovery of tax arrears.

12. The authorities retain their commitment to bring down the deficit to under 3 percent in 2012. Preliminary budget preparation is based on a cash deficit of 2.8 percent of GDP, generating an additional improvement in the structural fiscal balance of just over 1 percent of GDP. The authorities’ plan assumes savings from reforms already implemented such as pension reform, means testing for social programs, and continued expenditure restraint, especially on the wage bill and subsidies. Health reforms should also contribute (¶16). The capital budget will be preserved, but greater focus will be placed on EU fund absorption (LOI ¶12) and on project prioritization after the comprehensive review of existing projects is completed by end-September (structural benchmark). Successful achievement of the agreed adjustment would require that the authorities resist political pressures to reduce social contribution rates, to increase infrastructure spending in the Ministry of Regional Development, or to hike wages more quickly than the gradual path agreed in the preliminary budget (¶14).

13. While a cash deficit of under 3 percent of GDP appears achievable based on the preliminary budget proposed by the authorities, reaching the authorities’ commitment to the EU of under 3 percent of GDP in accrual (ESA) terms will prove challenging. First, the gap between ESA and cash deficit measures has traditionally been on the order of ½–¾ percent of GDP, meaning another ¼–½ point of GDP in adjustment would be necessary.3 Second, Eurostat’s pending decision to add additional SOEs into the general government definition could perhaps add another ¼ percent of GDP to the deficit.4 Thus, a further adjustment of ½–1 percent of GDP would likely be required to make the EU target in accrual terms.

A01ufig08

Public Sector Employment

(in Millions, end of period)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Ministry of Public Finanace; IMF staff estimates.

14. Ambitious reductions in public employment have created some fiscal space to restore public wage cuts. The 25 percent wage reduction in 2010 was combined with a sharp drop in public employment, which allowed for a partial restoration in the 2011 budget (via an increase of 15 percent). During 2011, public employment has continued to decline—more rapidly than originally envisaged—leaving room to gradually reinstate the remainder of the wage cut by end-2012—as mandated by the Constitutional Court. The timing and amount of increases will be conditioned on further progress in reducing public employment so as to maintain the total wage bill at 7.5 percent of GDP in 2011 and 7.2 percent of GDP in 2012, down from 9% percent of GDP in 2009.

15. Arrears are decreasing but challenges remain in local governments, SOEs, and the health sector (LOI ¶9).

  • Central government and social security arrears met the Q2 performance criterion, and as such remain near zero. However, significant unpaid bills exist in the health sector which the authorities must pay in order to avoid the accumulation of new arrears in the remainder of the year.

  • In local governments, provisions of the new local public finance law have started to bear fruit, with local arrears decreasing by about RON 100 million in the first semester.5

  • In contrast, SOE arrears have continued to increase and further efforts are needed to reverse this trend (LOI ¶22-25).6 SOE arrears of monitored companies amount to 3.6 percent of GDP, with additional arrears reported in SOEs outside of those monitored under the program. The authorities have prepared a series of schemes to clear SOE arrears via netting arrangements, debt swaps, recapitaliation of firms, arrears securitization and government lending, and/or guarantees. These arrangments are expected to reduce arrears by up to 1 percent of GDP by year-end. The authorities will also restructure SOEs at the same time to preclude accumulation of new arrears.

A01ufig09

Central government SOE Arrears

(billions, RON)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Romanian authorities: IMF staff estimates.Data for 2011 includes information for 284 SOEs, beforehand 154 SOEs.
A01ufig10

General Government Unpaid Bills and Arrears (over 90 Days Overdue)

(billions of RON)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Romania authorities; IMF staff estimates.

16. The authorities will implement a comprehensive health reform in 2012 to address the structural deficits of the healthcare system. Past measures, such as the closure of small hospitals or the clawback tax on pharmaceuticals, have failed to generate the anticipated savings and the authorities have agreed on the need for a more comprehensive approach. Comprehensive amendments to the health care legislation will be prepared by end-December 2011 (structural benchmark) with two key objectives (LOI ¶15):

  • Contain the growth of health spending, by (i) reviewing the package of benefits insured by the government to exclude costly nonessential health services; (ii) revising the list and price of compensated drugs; and, (iii) further promoting the use of generics.

  • Ensure adequate financing. Public healthcare spending in Romania is among the lowest in the EU as a share of GDP and budget allocations should be sufficient to cover realistic spending programs. Additional sources of revenue will also be needed to reduce budgetary shortfalls; the authorities proposed to (i) introduce copayments for medical services; (ii) create a supplementary insurance contribution to finance over-the-basic coverage (with a possible private option); and, (iii) revise and simplify the clawback tax on pharmaceuticals (structural benchmark).

Table: Public Health Spending in EU Countries

(Share of GDP)

article image
Sources: Eurostat, OECD, WDI.

17. The financing strategy remains focused on extending the maturity of the domestic debt and consolidating financing buffers. The authorities have made progress in building the domestic yield curve, with the average maturity on domestic government debt rising from 2.7 years at end-December 2009 to 4.1 years at end-June 2011. The authorities launched the euro medium-term note program with a first issue in June and plan to continue regular external bond issuances both in euros and dollars. To protect government finances against external shocks, the authorities are building up foreign currency buffers, with a view to maintain at least four months of gross financing needs. Technical assistance missions provided by the IMF, European Commission (EC), and World Bank (WB) are also helping to strengthen the authorities’ debt management capacity and strategy.

18. The authorities continue to suffer from difficulties in improving EU structural funds absorption and prioritizing capital spending. The level of projects contracted under EU funded projects has increased significantly in recent months, but certified absorption remains weak, and difficulties have recently surfaced in some of the expenditures submitted for reimbursement, causing the government to pause reimbursement applications until the difficulties are resolved. Efforts are underway to strengthen the administrative capacity of units managing the funds, including by providing expert assistance to help beneficiaries in all project stages. The authorities have started prioritizing investment projects to release cofinancing funds for EU related projects. The database of all investment projects at the central level was completed in June, and a final report with an action plan on prioritizing investment is expected by end-September (structural benchmark). The government will also amend public procurement legislation to bring it in line with EU requirements, and will develop standard bidding documents for key sectors to reduce contested tenders.

19. Tax administration reforms continue aimed at facilitating improved tax compliance and reducing collection costs. The authorities have prepared a plan to promote the use of indirect audit methods in order to assess tax liabilities. They passed the government decision on ANAF restructuring and have closed 141 regional offices. An ordinance was adopted in August to eliminate the legal basis of the stimulente funds (structural benchmark). Going forward, the authorities intend to introduce a simplified tax regime for small taxpayers in 2012 (end-December structural benchmark) and have already requested from the EU an increase in the VAT mandatory threshold. Based on the recommendations of the IMF technical assistance mission of July, the authorities will also improve VAT refund processes and expand the tax audit of large taxpayers.

B. Structural Reforms

State-Owned Enterprises

20. Deep-rooted SOE reform remains crucial for increased economic growth and sustained fiscal adjustment. The stocktaking exercise on public companies has revealed more firms than previously recorded (particularly in local governments) and the size of arrears is significantly higher than previously anticipated. Reform measures under the program are beginning to bear fruit, but significant additional effort is needed. The operating losses of firms monitored under the program have fallen, restructuring efforts are underway, and plans for arrears reduction and full and partial privatizations are advancing.

21. Initiatives to improve SOE governance are advancing. Under the program, legislation is being prepared which will require regular independent external audits, quarterly publication of financial data, and reinforcement of OECD principles on corporate governance (structural benchmark). Private management experience will be brought into the largest SOEs that remain under majority government ownership. Financial control of SOEs will be moved from line ministries to the MOPF and will include enhanced reporting mechanisms. Action plans were prepared to restructure the SOEs and reduce their arrears (structural benchmark, LOI ¶7 and ¶22).

22. Restructuring of SOEs is progressing, including an envisaged significant reduction of arrears. Restructuring plans are being finalized for about 150 central government SOEs, and those for the 18 SOEs monitored under the program are being implemented. For companies newly integrated into the database of the MOPF, restructuring plans will be developed before year-end. Arrears reduction plans have been identified for specific companies, envisaging a reduction of nearly 1 percent of GDP. The MOPF and line ministries continue efforts for additional arrears reductions, while maintaining consultations with EU competition authorities to avoid state-aid related market distortions (LOI ¶9).

A01ufig11

Performance of Monitored SOEs

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

23. First steps in the privatization process have been taken, but obstacles may impede timely sales of stakes in companies. The recent offer of a 10 percent stake in Petrom, a profitable company with private majority ownership, was unsuccessful. While this may have been due to the pricing and timing of the offer rather than a fundamental lack of interest in Romanian companies, unsettled international market conditions may affect the agreed timetable for sales. Nevertheless, the government remains committed to the agreed calendar for privatization. The government is preparing to sell the remainder of chemical company Oltchim, and minority stakes in airline Tarom, and energy companies Romgaz, Transelectrica, and Transgaz. Legal advisor for most of these firms have been appointed. A second group of companies will include minority stakes in Hidroelectrica and the second attempt to sell the 10 percent stake in Petrom in early 2012. A third group includes minority stakes in Nuclearelectrica and majority privatizations of the governments remaining distribution, as well as supply companies and major electricity producers later in 2012. The transaction advisors for group one and the legal advisors for group two will be appointed by end-October as crucial steps in the process (structural benchmark). In the event that international market conditions impede timely privatizations, alternative actions will be agreed to improve operations in those firms.

24. In the energy sector, restructuring measures and regulatory reforms aim at attracting private investment. After three years of unsuccessful efforts to form two national “champions,” the government has agreed to pursue an alternative strategy, with smaller energy companies and a greater role for private capital. In addition to the minority stakes to be sold in major energy companies, the authorities are continuing with plans to phase-out unprofitable coal operations while spinning-off viable mines. They are also proceeding with plans to separate viable entities in energy producer Termoelectrica while winding-up other operations. To avoid further arrears accumulation in district heating companies, local governments will be required to budget and pay heating subsidies if they envisage a lower consumer price than recommended by the regulator. To address pricing and regulatory framework deficiencies, steps are under preparation to restore the energy regulator’s (ANRE) operational and financial autonomy, and additional steps are envisaged to liberalize the energy market (LOI ¶26). To better balance the gas market, the CUG for non-residential customers will be increased by 8 percent as a prior action as part of a phased plan to align prices with a formula-based approach that ensures full cost recovery. Once the CUG formula price is fully reached, the authorities will continue to adjust nonresidential prices to reach international prices by end-2013, and residential prices will be gradually adjusted thereafter to reach international rates by end-2015. The authorities will take necessary steps to terminate existing below market bilateral contracts of state-owned gas and electricity generators and new contracts will be conducted fully transparently.

25. In the transport sector, steps to improve infrastructure and increase efficiency in service provision are underway. Major infrastructure projects using EU structural funds have been approved and project execution is beginning. Revenues will be increased through tariff adjustments and enhanced toll collection, while costs will be reduced by better aligning staffing, refocusing services, extending the use of standard costs for contracts as well as enhanced control mechanisms. These measures include a reduction of the rail network maintained by the public infrastructure company to 5,500 line km via line closures and tendering lines out. To bring in private management and capital, the authorities will offer minority stakes in the national air carrier (Tarom) and appoint private professional management for all main rail companies and Tarom.

Other Reforms

26. The authorities have undertaken important reforms in labor legislation and social protection. The new Labor Code, enacted April 30, aims to promote fixed-term and temporary employment, extend probation periods, and increase the flexibility of working hours. A substantial number of new contracts (600,000) have been registered since April, perhaps reflecting early improvement in registering previously underground employment. The authorities are continuing making efforts to streamline social assistance while protecting the vulnerable through means-testing of benefits. A new Social Assistance Code has been drafted to consolidate the existing 54 categories of social benefits into 9. Social inspection has yielded significant results, as the number of beneficiaries of heating allowances has declined by half in 2011. The overall measures on social benefit reforms will result in fiscal savings of around 0.8 percent of GDP in 2010–13. Judicial reforms are also underway to improve the efficiency of the legal system and reduce corruption.

C. Financial Sector Policies

27. There are emerging signs of a tentative recovery in lending and the banking system remains well capitalized, but risks have risen from difficulties elsewhere in Europe. Lending picked up in the second quarter of 2011, which more than offset the contraction over the previous quarter. The average capital ratio for the system was 14.2 percent as of end-June with the pace of the increase in non-performing loans slowing slightly. Sustained improvement remains dependent upon the economic recovery gaining traction, with the risks on the downside due to potential spillovers from the European periphery. As of end-July 2011, the aggregate exposure to Romania of the nine largest foreign banks participating in the European Bank Coordination Initiative stood at 95 percent of the level when the initiative commenced, down from over 98 percent the month before, perhaps reflecting recent international market turbulence.7

Romanian Banking System - Core Indicators (in percent)

article image
Source: NBR.

Tier 1 capital / total average net assets.

Unadjusted exposure from loans classifieds as “loss” defined as past 90 days and/or initiation of legal preceding / total loans and interest, excluding off-balance sheet items.

Unadjusted exposure from loans and interest falling under “doubtful” and “loss” / total classified loans and interest, excluding off-balance sheet items.

Cash, sight and term deposits with banks plus government securities free of pledge / total liabilities.

28. The NBR remains vigilant to weaknesses in the banking system which may be exacerbated by spillovers from the European periphery. The NBR remains alert to the risk of spillovers from the European periphery as well as from uncertainties in euro area parent banks.8 Greek banks operating in Romania in aggregate hold around 16 percent of system assets, but they remain well-capitalized, although they generally pay somewhat higher deposit rates than the market average. The NBR stands ready to provide liquidity as necessary to mitigate segmentation in the interbank market and is refining its full range of contingency measures to deploy if necessary to preserve depositor confidence. Some small- and medium-sized banks with high cost ratios, rising loan impairments, and lower than average provisions continue to incur losses. Further capital will be required in some cases, under the continued close oversight of the supervisor.9 A salutary trend for consolidation in the banking sector may be emerging, as evidenced by the recently announced merger of Alpha Bank and EFG Eurobank, which will also join their operations in Romania.

29. Progress continues on strengthening contingency planning and banking regulation. Significant progress has been made in finalizing the outstanding benchmark to enable the Deposit Guarantee Fund (DGF) to finance the new bank resolution and restructuring tools, such as purchase and assumption (modified benchmark). In addition, and as part of ongoing contingency planning, the authorities are committed to passing legislation which would provide for bridge bank powers to strengthen the range of bank resolution tools available. The authorities are finalizing the regulatory framework and tax treatment for filters for provisioning that will preserve the current prudent approach once International Financial Reporting Standards are introduced for banks at the beginning of 2012. The NBR will also shortly issue new regulations10 to discourage un-hedged consumer borrowing in foreign currency to reduce the risk of further euroization of lending, including steps to tighten the regulatory treatment of banks’ foreign exchange lending.

D. Monetary and Exchange Rate Policies

30. Notwithstanding the recent drop in inflation, the central bank is vigilant against inflation risks and remains committed to take action as needed to assure achievement of its 2012 inflation target. The NBR has held policy rates stable since May 2010 and shifted to a tightening bias owing to increasing inflationary concerns. As the inner program band was exceeded at end-June, staff held consultations with the authorities on inflation during the review mission. With inflationary pressures now starting to recede and little evidence of second round effects thus far, the central bank did not see an immediate need for an increase in policy rates. Nevertheless, the authorities remain concerned about upside risks stemming from expected increases in administered prices.11 Staff agreed that immediate action was no longer needed, but noted that additional exchange rate weakness could also translate into higher prices. They noted that open market operations will be continued to mop up excess liquidity and bring interbank rates closer to the policy rate.12 Staff cautioned, however, that in light of gathering risks of contagion from financial disturbances in the region and possible capital outflows, any foreign exchange intervention should be aimed towards increasing reserve buffers rather than mopping up leu liquidity, and that a hike in the policy rate would be needed if headline inflation remains higher than the currently projected path in the coming months. The mission also noted that the NBR should avoid letting considerations of its own balance sheet unduly affect its choice of monetary policy instruments.

A01ufig12

Interest Rates on RON Instruments

(in percent)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: National Bank of Romania; and Haver.
A01ufig13

Monetary Conditions Index 1/

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

1/ Weighted average of the annual change in the 3-month interbank offer rate and the nominal effective exchange rate (at a ratio of 1.5 to 1)

31. Romania’s competitiveness remains adequate. The depreciation in recent months has partially reversed the appreciation of the REER experienced earlier in the year. Romania’s exports continue to gain world market share and staff’s exchange rate assessment based on extended CGER analysis does not show a misalignment in the currency.

32. Reserve coverage of short-term liabilities remains above 100 percent. The rise in gross international reserves in the first half of the year was partly offset by the heavy net repayment of Treasury’s domestic euro liabilities by around €2.6 billion in July. The change in the profile for fiscal financing (aimed at extending maturities of existing issues and efforts to build the yield curve), coupled with volatility in international financial markets, shifted the projected reserve accumulation to the last quarter of the year (LOI¶29).

IV. Program Modalities and Other Issues

33. The attached Letter of Intent (LOI) describes the authorities’ progress in implementing their economic program and sets out their commitments through end-December 2011. Some modifications to the program’s conditionality are proposed (Tables 1-2):

Table 1.

Romania: Quantitative Program Targets

article image

The end-December 2010 figure is a stock.

Cumulative flows relative to end-December 2010 stock.

Cumulative figure during calendar year (e.g. March 2011 figure is cumulative from January 1, 2011).

Adjusted performance criterion for end-June.

Table 2.

Romania: Performance for Second Review and Proposed New Conditionally

article image

  • One prior action is proposed: for an increase of 8 percent in the CUG gas price for nonresidential consumers, which is essential to help normalize the gas market and avoid losses in SOEs.

  • A modification in the end-September NFA target is proposed. The end-year target is unchanged, but the end-September target is proposed to be reduced from 500 to 250, reflecting a change in the profile of fiscal financing (¶32)

  • Revisions to the timeframe for achieving the structural benchmarks are proposed: (Table 2) In view of the administrative and legal feasibility within the stipulated timeframe, the target date for meeting the structural benchmark for: (i) approval of new legislation on SOE corporate governance is shifted to Oct. 31, 2011; and (iii) Amending legislation to allow the DGF resources to facilitate bank restructuring is brought forward to Sept. 30, 2011.

  • New structural benchmarks are being added: (Table 2) (i) As part of the restructuring and privatization strategy, appointment of legal advisors and/or privatization advisors in certain SOEs in preparation for privatization tenders by October 31, 2011; (ii) approval by executive decree of a new clawback tax mechanism for pharmaceuticals to help control consumption growth while generating additional revenues for the health care system, which is essential to achievement of the program’s fiscal and general government arrears targets by November 30, 2011, and (iii) Approval by the cabinet and submission to parliament of comprehensive amendments to health system legislation by December 31, 2011. The naming of advisors is essential for the SOE reform and privatization process, as the privatizations will bring significant additional investment into the transport and energy sectors to boost growth, while significantly improving transparency and operational efficiency. The clawback tax and the amendments to the comprehensive health care legislation are crucial for tackling the fiscal problems stemming from the public healthcare system by both raising revenues and reducing incentives for higher pharmaceutical spending.

34. Program Modalities. Romania is not expected to face actual balance of payments financing needs in 2011 and 2012, and the Stand-By Arrangement, as well as financing commitments from the EU are expected to continue to be treated as precautionary. In the event of a shock scenario in the euro area periphery, staff analysis suggests that reserve buffers should be adequate to cover potential financing gaps arising from a direct liquidity shock to the banking system and indirect economy-wide shocks. However, risks have risen of a larger international financial shock which could lead to drawings under the Stand-By Arrangement.

35. Program risks. Romania’s capacity to repay the Fund is expected to remain strong. Fund credit outstanding would peak in 2011 at 33.6 percent of gross reserves. Peak payments would be in 2013–14 at a still manageable 11.6 and 10.9 percent of gross reserves and around 8.2 and 7.2 percent of exports of goods and services. While this exposure remains large, servicing risks are mitigated by the relatively low level of public debt. Direct public indebtedness is expected to remain under 35 percent of GDP, with public external debt peaking at around 15 percent of GDP in 2012. Total external debt is projected to peak at end-2011 to 75.4 percent of GDP and decline thereafter. In addition, an update of the 2009 safeguards assessment found a robust safeguards framework at the NBR, while recommending measures to sustain NFA reporting standards and effective audit oversight, and enhance accounting disclosures.

36. Fund staff has continued to cooperate closely with the staff of the EC and the WB. Fund, EC and the WB staff have consulted each other regularly regarding economic and policy developments in Romania, and EC and WB staff participated in Fund meetings with the authorities. The EC approved disbursal of the final tranche of its support program (€150 million) in May and approved their new precautionary arrangement of €1.4 billion which parallels the new Fund SBA.

V. Staff Appraisal

37. Romania’s economic growth continues, but the recovery is fragile and no effort should be spared in minimizing policy risks. While staffs baseline forecast remains favorable, the recent resurgence in international economic uncertainty could threaten Romania in several ways. Lower European growth could depress the heretofore booming export sector. Financial sector disruptions could spill over into the country via the largely foreign-owned banking sector. International financial market uncertainties could raise borrowing costs and threaten access to government financing and private investment resources. For this reason, it is more essential than ever that the authorities maintain their commitment to the policies contained in the Fund-supported program so as to minimize contagion risks. Strong fiscal financing buffers, financial sector buffers from tight prudential requirements, and foreign exchange buffers from high NBR reserves can act—together with an unwavering commitment to prudent fiscal and monetary policy—as a crucial line of defense against an uncertain international climate.

38. Fiscal performance in 2011 has been excellent, and achievement of the year-end target is highly likely. The difficult fiscal measures undertaken in 2010 have borne fruit in a falling deficit and overperformance vis-a-vis the program targets in 2011. The authorities’ commitment to continued reductions in public employment have been particularly successful in creating the needed fiscal space to gradually restore wages to remaining workers. However, chronic problems in health care spending must be decisively addressed. The unsustainable practice of recent years has been to budget at a level below that needed to cover the legal entitlements of the system, and then to try to paper over the gap with arrears and half-measures. In this context, the authorities’ decision to implement a more comprehensive reform is welcome. Additional efforts are also needed to fully execute the 2011 capital budget, where the authorities consistently underperform, especially on EU-related investment spending.

39. The medium-term fiscal outlook is favorable, but there are challenges in reaching the EU 2012 deficit target. Pension, social benefits, and public wage reforms should produce significant additional savings in the coming years. If the health care problem is adequately dealt with, the authorities’ medium-term fiscal objectives are well within reach. However, the 2012 deficit target agreed with the EU may prove difficult. Prudent expenditure policies already contemplated should yield a cash deficit of under 3 percent of GDP. But to reach the accrual deficit target of under 3 percent with the EU, the authorities will have to make provisions for the gap between accrual and cash accounting (traditionally around ½–¾ percent of GDP). In addition, Eurostat is expected to incorporate into the fiscal accounts a number of loss-making SOEs, which would require further fiscal adjustment of up to another ½–1 percent of GDP. Arrears reduction should reduce the gap between cash and accrual accounting, but further measures would be required. SOE reform measures for those firms coming under the general government could also help. While there might be some room for reductions in capital spending, few other areas of quick expenditure cuts remain. New short-term revenue raising measures will also prove difficult, given the increases in excise, social contribution, and VAT rates already implemented in 2009–10.

40. Implementation of planned structural reforms is essential if sustainable economic growth is to be maintained. The stocktaking exercise recently completed has uncovered a larger number of enterprises with significantly higher losses and arrears than previously understood. This discovery has reinforced the need for action to restructure, privatize, or close these firms. The SOE reform agenda is very ambitious, both politically and technically, particular given upcoming elections in 2012. But from the standpoint of macroeconomic impact, an even more ambitious approach would have been preferable, as even the completion of all reforms under the program will still leave a large state-owned sector only partially adapted to the needs of a modern EU state.

41. The authorities’ strongly proactive stance in banking supervision has helped forestall banking sector difficulties, but risks have risen sharply. With more than 80 percent of the banking system controlled by foreign banks (including several from the euro area periphery), Romania is particularly vulnerable to increasing banking sector uncertainties elsewhere in Europe. While significant capital and liquidity buffers exist in the system, the authorities should step-up efforts to ensure future stability. Enhanced monitoring of banking sector flows should be coupled with detailed contingency plans for any domestic banking problems, as well as possible contagion from the euro area. The authorities should continue to develop procedures to use their newly enhanced bank resolution powers so as to be fully prepared in the event a bank were to face problems. In this respect, the recent commitment to provide the legal mechanism for bridge banking activities is particularly welcome. The authorities also need to remain alert to any difficulties in small local banks.

42. While the urgency of tightening monetary policy has eased due to the exceptionally steep fall in inflation in the past few months, vigilance is still needed. It is still likely that the end-2011 inflation target will be missed, and the inflation consultation mechanism under the program may still be triggered in future reviews. Further expected hikes in administered prices, increasing inflation expectations, and recent depreciation pressures suggest that inflation risks remain. Staff continues to advise a tightening bias in monetary policy until the inflation path returns to the range consistent with the inflation target. The authorities have attempted to avoid excessive RON liquidity via foreign exchange intervention. While this is an admirable objective to reduce inflationary pressures, staff would advise minimizing exchange market interventions in favor of a reliance on open market operations so as to preserve an adequate cushion of NBR reserves given the heightened instability in international markets. The NBR should also avoid letting considerations of its own balance sheet unduly affect its choice of monetary policy instruments.

43. On the basis of Romania’s performance under the SBA, staff supports the authorities’ requests for completion of the second review under the new arrangement. Staff also recommends approval of the modification of program conditionality, as proposed in the attached Letter of Intent.

Box. The Stand-By Arrangement

Access: SDR 3,090.6 million, 300 percent of quota.

Length: 24 months.

Phasing: SDR 60 million was made available upon Board approval of the arrangement on March 25, 2011, which became effective on March 31, 2011. The subsequent disbursement of SDR 430 million became available on June 27 with the completion of the first review. SDR 430 million will be made available subject to the completion of this review. Six subsequent disbursements, totally SDR 2170.6 million, are contingent upon completion of the third to the eighth review.

Conditionality

• Quantitative Performance Criteria

➢ A floor on the change in net foreign assets

➢ A ceiling on central government and social security domestic arrears

➢ A floor on the overall general government cash balance

➢ A ceiling on general government guarantees

➢ Non-accumulation of external debt arrears

• Quantitative Indicative Targets

➢ A ceiling on general government current primary spending

➢ A ceiling on local government domestic arrears

➢ A floor on the operating balance and a ceiling on arrears of the key loss-making SOEs

• A consultation band around the 12-month rate of inflation of consumer prices

• Prior Action

➢ Increase the gas price for non-residential customers by 8 percent, in order to further align with CUG formula.

• Structural Benchmarks

➢ Undertake SOE reforms, including (i) Appointment of legal advisors for privatization of CFR Marfa, TAROM, Transelectrica, Transgaz, and Romgaz; (ii) Preparation of action plans for the remaining SOEs of the central government; (iii) Design mechanisms to facilitate restructuring and securitizing SOE arrears. July 15, 2011.

➢ Eliminate by government ordinance the legal basis of stimulente funds, effective January 1, 2012. August 31, 2011.

➢ Completion of a comprehensive review of the existing investment portfolio, which will prioritize and evaluate existing projects to focus on those where funding can be fully secured, examine the viability of old projects, with low priority and unviable ones discontinued, and production of a final report and an action plan. September 30, 2011.

➢ Selection of advisors for SOE reform (i) Select transaction advisors for group1 and (ii) legal advisors for group 2. October 31, 2011(proposed).

➢ Amend legislation to allow the use of the deposit guarantee fund resources to facilitate bank restructuring, including purchase and assumption transactions. September 30, 2011 (Reset from November 30, 2011).

➢ Approve legislation to improve governance of SOEs. October 31, 2011(Reset from August 31, 2011).

➢ Impose a revised clawback tax on the pharmaceuticals based on the growth in their costs or above a pre-determined threshold. November 30, 2011 (proposed).

➢ Introduction of a simplified taxation system for smaller taxpayers under the threshold with help from the IMF and EC, while requesting a shift in the VAT mandatory threshold from the EU Council of Ministers to €50,000. December 31, 2011.

➢ Prepare comprehensive amendments to the health care legislation to address the persistent budgetary shortfalls and to ensure high quality health care services. December 31, 2011(proposed).

Figure 1.
Figure 1.

Romania: Real Sector, 2007-11

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver.
Figure 2.
Figure 2.

Romania: External Sector, 2007-11

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver.1\2011Q1 is a projection foryear2011.
Figure 3.
Figure 3.

Romania: Labor Sector, 2007-11

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver.
Figure 4.
Figure 4.

Romania: Monetary Sector, 2005-11

(Percent)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Haver; Romania National Bank; Consensus Forecast; IMF staff estimates.1/ Price Trends over next 12 Months.
Figure 5.
Figure 5.

Romania: Fiscal Operations, 2005-12

(Percent of GDP)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Romania National Authorities.
Figure 6.
Figure 6.

Romania: Financial Sector, 2007-11

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Dxtime; Romania National Bank.
Figure 7.
Figure 7.

Romania: Financial Developments

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Source: Bloomberg; Haver.
Figure 8.
Figure 8.

Romania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: International Mo netary Fund. country desk data, and staff estimates.1/ Shaded areas represent act jal data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Tendear historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent 11 abilities occur in 2010, with real depredation defined as nominal depredation (measured by percentage fall Indollar value of local currency} minus domestic inflation (based on GDP deflator).
Figure 9.
Figure 9.

Romania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 297; 10.5089/9781463921910.002.A001

Sources: International Mo netary Fund. country desk data, and staff estimates.1/ Shaded areas representactual data. Individual shocks are permanentone-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applled to real interest rate: growth rate: and current account balance.3/One-time real depreciation of 30 percent occurs in 2010.
Table 3.

Romania: Selected Economic and Social Indicators, 2007-12

article image
Sources: Romanian authorities; Fund staff estimates and projections; and World Development Indicators database.

Excludes receipts from planned privatizations under the program.

Actual fiscal balance adjusted for the automatic effects of the business cycle.

Table 4.

Romania: Macroeconomic Framework, Current Policies, 2008-16

article image
Sources: Romanian authorities; and Fund staff estimates and projections.

Actual fiscal balance adjusted for the automatic effects of internal imbalance (output gap) and external imbalance (absorption gap) on the fiscal position.

Table 5.

Romania: Balance of Payments, 2008-16

(In billions of euros, unless otherwise indicated)

article image
Sources: Romanian authorities; and Fund staff estimates and projections.

Includes IMF disbursement to the Treasury of €0.9 billion in 2009 and €1.2 billion in 2010.

Operational defition. Reflects the allocation of SDR 908.8 million that was made avaialable in two tranches in August and September 2009.

Table 6.

Romania: Gross Financing Requirements, 2010-12

(In billions of euros, unless otherwise indicated)

article image
Source: IMF staff estimates.

Includes includes portfolio equity, financial derivatives and other investments, assets position.

Last disbursement of the current program is treated as precautionary

Operation Definition

Table 7.

Romania: General Government Operations, 2007-12

(In percent of GDP)

article image
Sources: Ministry of Finance; Eurostat; and Fund staff projections.

2011 pension increase partly due to a reclassification of pensions from state budget to the pension fund.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated public debt, including government debt, local government debt, and guarantees.

Percentage deviation of actual from potential GDP.

Includes guarantees and intra-governmental debt.

Includes arrears reduction plans in VAT (551 m), nontax revenues (876m), subsidies (736m), other transfers (454m) and other social transfers (237m).

Table 7.

Romania: General Government Operations, 2007-12

(In millions of RON)

article image
Sources: Ministry of Finance; Eurostat; and Fund staff projections.

Includes EU-financed capital projects.

Does not include all capital spending.

Total consolidated public debt, including government debt, local government debt, and guarantees.

Includes guarantees and intra-governmental debt.

Includes arrears reduction plans in VAT (551m), nontax revenues (876m), subsidies (736m), other transfers (45 and other social transfers (237m).

Table 8.

Romania: Monetary Survey, 2009-12

(In millions of lei (RON), unless otherwise indicated; end of period)

article image
Sources: National Bank of Romania; and Fund staff estimates.

Rates for new local currency denominated transactions.

Table 9.

Romania: Financial Soundness Indicators, 2008-11

(In percent)

article image
Source: Romanian National Bank.

The NPLs represent un-adjusted exposures of loans and related interests overdue for more than 90 days and/or for which legal proceedings were initiated.

Return on equity is calculated as Net profit/loss to average own capital.

Liquid assets = balance sheet assets and off balance sheets items with residual maturity of up to 3 months.

Short term liabilities =balance sheet liabilities and off balance sheet items with residual maturity of up to 3 months.

Tier 1 Capital to average assets.

Table 10.

Romania: Schedule of Reviews and Purchases

article image
Source: IMF staff estimates.
Table 11.

Romania: Indicators of Fund Credit, 2011–16 1/

(In millions of SDR)

article image
Source: IMF staff estimates.

Using IMF actual disbursements, SDR interest rate as well as exchange rate of SDR/US$ and US$/€ of March 2, 2011.

End of period.

Repayment schedule based on repurchase obligations.

Table 12.

Romania: Public Sector Debt Sustainability Framework, 2006-16

(In percent of GDP, unless otherwise indicated)

article image

Coverage: General government gross debt, excluding guarantees.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 13.

Romania: External Debt Sustainability Framework, 2006-16

(In percent of GDP, unless otherwise indicated)

article image
e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in uro terms, g = real GDP growth rate, ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-ρ(1 +g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

1

As measured by the Core 3 indicator, which excludes energy, administered prices, unprocessed foods, alcohol, and tobacco.

2

This forecast includes the elimination of heating subsidy at the central government level, which will contribute to a 0.6 percent increase in annual inflation.

3

The authorities are designing a monitoring system to obtain timely information from these SOEs. Once it is fully functional, the performance criterion on general government overall balance in 2011 will be amended to include the operating balance of these entities.

4

Under Eurostat rules, an SOE must be included as part of the general government when more than half of its resources come from the state over a three year period. Several Romanian firms fall within this threshold and will be folded into the general government statistics in the course of 2011.

5

These provisions include mandatory allocations for unpaid bills, multi-year budgeting, commitment control mechanisms, borrowing rules, and safeguards against revenue overestimation.

6

Strategies to reduce SOE arrears include bankruptcy procedures, installment agreements, netting-out schemes among public institutions, provision of public resources via credits or debt-equity swaps (with the clearance by EU competition authorities), restructuring, and securitization.

7

While they have not set a specific target exposure level going forward these banks have affirmed their long term commitment to the country and continue to report exposures.

8

For a discussion of spillover risks, see the recent IMF Euro Area Spillover Report, http://www.imf.org/external/pubs/cat/longres.aspx?sk=25056.0.

9

In aggregate, these banks comprise less than 7 percent of the market share.

10

These regulations do not cover mortgage lending due to concerns about market impact. Housing in Romania is priced in euros and long term loans are denominated in foreign currency (primarily euros) as the domestic yield curve remains liquid at short maturities only.

11

Staff estimates the impact of reducing heating subsidies at about ½ ppt. on consumer prices. Transport prices for passenger rail and the Bucharest metro were hiked by 18 percent in August, but the impact on the CPI is likely to be minimal unless second round effects occur, as the weight in the index is low.

12

Romania has a large spread for its facilities around its policy rate (400 basis points, where the upper bound is the Lombard rate and the lower bound is the overnight standing facility). Over the past year, excess liquidity has led to a heavier reliance on the overnight standing facility which has allowed the interbank rate to come closer to the lower end of the band.

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Cover IMF Staff Country Reports
Romania: Second Review under the Stand-By Arrangement and Request for Modification of Performance Criteria-Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Romania.
Author:
International Monetary Fund
Volume/Issue:
Volume 2011: Issue 297
Publisher:
International Monetary Fund
ISBN:
9781463921910
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781463921910.002

Private Consumption and Retail Trade

GDP and Economic Sentiment Indicator

Inflation

(year-on-year, percent)

National Currency per Euro

(July 1, 2008 = 100)

CDS, 5-years

Exports (SA), Imports (SA), Trade Balance 12m

(billion Euros)

Inflation Targets and Outcomes

(in percent)

Public Sector Employment

(in Millions, end of period)

Central government SOE Arrears

(billions, RON)

General Government Unpaid Bills and Arrears (over 90 Days Overdue)

(billions of RON)

Performance of Monitored SOEs

Interest Rates on RON Instruments

(in percent)

Monetary Conditions Index 1/
Figure 1.

Romania: Real Sector, 2007-11
Figure 2.

Romania: External Sector, 2007-11
Figure 3.

Romania: Labor Sector, 2007-11
Figure 4.

Romania: Monetary Sector, 2005-11

(Percent)
Figure 5.

Romania: Fiscal Operations, 2005-12

(Percent of GDP)
Figure 6.

Romania: Financial Sector, 2007-11
Figure 7.

Romania: Financial Developments
Figure 8.

Romania: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)
Figure 9.

Romania: External Debt Sustainability: Bound Tests 1/

(External debt in percent of GDP)