Bancherul - BANCI / ENGLISH / Successful review of the IMF stand-by arrangement

BCR Research: Today, the IMF team completed another review of Romania’s 24-month stand-by arrangement. Key points from the press conference:

− The conditions for the next disbursement from the IMF are met and the NBR should receive EUR 0.9bn soon after the decision of the board

− The conditions for the third disbursement from the EC are also met and the Ministry of Finance should receive EUR 1.2bn in September

− The IMF does not believe the monetary policy needs tightening following the VAT hike; however, the NBR should remain cautious and try to counter potential second round effects of the recent VAT hike on the consumer prices

− IMF real GDP forecast is -1.9% in 2010 and 1.5%-2% in 2011

− IMF expects inflation at 7.5% - 8% y/y in December 2010. The inflation could enter the central bank target next year

− The IMF will work closely with the Romanian authorities to improve the flexibility of the labour market and to reduce its informal segment

− Authorities should strive to improve the absorption of the EU funds. The total volume of the structural funds available for Romania is EUR 20bn, equal to the volume of the financial package available from the IMF, EC, WB and EBRD

− It is premature to speak about a new agreement with the IMF and EC, but these two institutions are here to provide help in the future if needed. More talks on the occasion of another review of the current stand-by arrangement in the autumn

− The reform of the public pension system, public wage system, the implementation of the fiscal responsibility law and the reduction of the stock of domestic arrears rank high on the agenda of the government in the next months

− The IMF does not support a complete reversal of the recent 25% cut in public wages, but only some moderate increases next year

Market implications: the successful review of the IMF stand-by arrangement is positive news for the FX market and we maintain our forecast for the EURRON FX rate at 4.22 in December. We also stick to our scenario regarding upward pressures on domestic yields and wait for further developments (the disbursement from the EC in September).