Banks in Romania react to new taxes: a Bermuda Pentagon, a “perfect storm” at horizon; frozen investment plans, lower credit for the economy

The main banks in Romania have reacted on Friday to the new taxes imposed by the government for this year, saying that these measures will have a huge impact on credit activity and on the entire economy. The heads of the main banks said that the new taxes risk generating “a perfect storm” in the economy, as investment plans will be frozen, credit activity will decelerate and many companies will struggle to survive.

Desperately needing money to finance its soaring expenses, the government has recently introduced a tax on bank assets of 0.3 percent from January 1st, 2019, and capped the retail and corporate gas price at RON 68/Mwh.

The government also imposed special taxes of 2 percent of turnover on energy firms and 3 percent on telecom companies.

The CEOs of the main banks in Romania said that the impact in the economy will be tremendous.

“It is a true Bermuda Pentagon. There are three initiatives that have passed the Parliament, plus another initiative related to bank provisioning. All these initiatives that come with cadence create the premises of a perfect storm not only for the banking system but for the economy. Only the ordinance would be strong enough to create a tsunami,” Sergiu Oprescu, the president of Romanian Banking Association, said in a press conference that brought together the banks in Romania through their two associations.

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Banca Transilvania, the biggest bank in Romania in terms of assets, also estimate a huge impact of the new measures.

“We will reduce investment, train fewer people. (…) Banca Transilvania was planning to renovate over 200 agencies. That means dozens of construction firms will not get these contracts,” BT CEO Omer Tetik told reporters.

The second-biggest bank, BCR – controlled by Austria’s Erste Group -, has had a similar position.  “All our investment plans are now under review,” said Sergiu Manea, BCR CEO.

The government has not released until now a budget project for 2019 and many experts say it has no money to finance its soaring spending on public servants’ wages and pensions.

After the first 11 months of 2018, the public deficit was RON 26 billion (EUR 5.6 billion), or 2.74 percent of projected GDP. The deficit for the entire year 2018 was not yet released but some officials said that it hasn’t breached the European Union’s budget deficit ceiling of 3 percent of GDP.

The European Commission has recently established that Romania took no effective action in response to the Council recommendation of June and now proposes a revised recommendation of an annual structural adjustment of at least 1 percent of GDP in 2019.

A recent BR analysis showed that the Romanian Finance ministry is beginning to feel the consequences of its own measures as banks and other investors are showing lower interest in buying sovereign bonds and demanding higher interest rates.