Bancherul - BANCI / ENGLISH / Raiffeisen Research: Romania qualifies for the third tranche from European Commission amounting to EUR 1.2 bln

Last week representatives from EC, IMF and WB conducted a joint technical mission in order (i) to assess current and prospective macroeconomic developments in the Romanian economy given the new fiscal austerity measures implemented at the beginning of July 2010 and (ii) to evaluate whether conditionalities under the EUR 20 billion financial aid package agreed in 2009 are met.

The mission concluded on Wednesday, that prerequisites for the third tranche from European Commission amounting to EUR 1.2 billion have been fulfilled. The fiscal consolidation measures discussed at the previous meeting in May-June have been implemented. We recall the key measures from the austerity program: (i) a cut by 25% in wages in public sector, (ii) an increase in value added tax (VAT) from 19% to 24%, (iii) a cut in social transfers (excluding pensions) by 15%, (iv) a tax of 16% on interest on deposits and luncheon tickets, (v) a cut in current expenses with goods and services in the public sector, and (vi) lay-offs in public sector.

According to the mission outcome, the measures implemented so far by the government, as well as those remaining to be enforced throughout the second half of 2010 (mainly related to lay-offs in the public sector), seem to be sufficient to bring down the budget deficit within the agreed targets (7.3% in 2010 and 4.9% in 2011 based on ESA methodology). However, in our opinion reaching the public sector lay-off targets in 2010 would be extremely challenging as it will require strong political commitment.

The technical mission said that the recovery of economic growth would be delayed by the negative impact of the fiscal austerity measures on aggregate demand as well as by the consequences of the recent floods. Economic growth is expected to enter in the positive territory from 2011 onwards. Their forecast for GDP growth in 2010 is a contraction of -1.9% and a growth of +1.5%-+2% in 2011. The impact of VAT hike on inflation would most probably be temporary, depending on the timing and size of the second round effects.

According with the EC, IMF and WB technical mission further progress has been recorded on other reforms which are preconditions for the next tranches from European Union. The pension law is planned to be approved by the Parliament in September. An independent Fiscal Council has been established aimed at strengthening the fiscal policy framework. Also Romanian authorities are determined to take the necessary steps to increase EU funds absorption and combat tax evasion.

So, we can say that the outcome of the EC, IMF and WB technical mission was positive and this should be well received by the markets.