BR Analysis. Romania has a difficult job in controlling public finances during Q4 2018 amid worries about fiscal policy, political situation

Sorin Melenciuc 03/10/2018 | 07:00

Romania’s Ministry of Finance (MoF) has a difficult job in controlling the fiscal gap and maintaining the public deficit under the 3 percent of GDP during the last quarter of this year, after poor results in the first nine months of this year, amid worries about fiscal policy and political situation.

In October, MoF has scheduled RON 4.7 billion (EUR 1 billion) fresh issuance of T-bills and bonds following weak demand and rising interest rates during the last year.

Experts warn that the government could face problems in raising money from investors in order to cover unsustainable expenses.

“October’s issuance calendar of the Ministry of Finance of RON 4.7 billion (that is including optional supplementary non-competitive auctions) seems somewhat large compared to this year’s average monthly issuance and compared to the relatively frail demand for bonds, especially if we consider that October is a quarterly tax payment month, when generally liquidity dries up in the banking system,” BCR chief economist Horia Braun Erdei told Business Review.

Larger fiscal gap

Romania’s general consolidated budget, which includes fiscal and social budgets of the government, registered after the first eight months of this year a deficit of RON 14.56 billion (EUR 3.1 billion), or 1.54 percent of GDP, 2.2 times bigger compared with the same period of 2017 as soaring expenses overshadows revenue increase, according to the Ministry of Finance.

“Due to the increasing share of rigid state spending, the commitment to the budget deficit limit of 3.0 percent of GDP could become a trade-off between political costs associated with this ‘fiscal rule’ and those arising from entering the excessive deficit procedure (EDP), including lower budget flexibility,” ING Bank economists wrote in a recent report.

The general budget in the first eight months of 2018 closed with a deficit of RON 14.56 billion, or 1.54 percent of GDP, compared with a deficit of RON 6.5 billion in the same period of 2017, Finance Ministry data show.

After the first seven months of this year, the budget registered a deficit of RON 11.9 billion, or 1.26 percent of GDP.

Official data suggest the deficit for the month of August was close to RON 2.6 billion (EUR 564 million), making it more difficult for the government to maintain the fiscal gap below its target of 3 percent of GDP.

These numbers put pressure on the Ministry of Finance to find money needed to cover larger expenses on public wages and pensions.

“It is normal from the Ministry of Finance to scale up issuance in the context of a foreseen peak of bond redemptions and deficit spending which will come at end-November and in December, respectively. It’s also quite possible that the MoF is trying to take advantage of a small window of opportunity in global emerging markets, where sentiment has been improving in the last couple of weeks,” Braun Erdei points out.

Higher borrowing costs

Experts are particularly concerned about the rapid increase of government’s interest expenses. Official data show that interest expense rose by 21.3 percent during the first eight months of this year, to RON 9.03 billion, from RON 7.4 billion in January-August 2017.

Higher deficits can make it more difficult for the Romanian government to raise funds in order to finance the public debt.

“Also, they may also rely on the NBR alleviating the temporary liquidity shortage through its weekly repo auctions, which by the way is a perfectly normal policy from the central bank’s side,” BCR chief-economist said.

Romania is already EU’s member state which pays the highest interest rates for its debt (3.96 percent per year in 2017) and recent Eurostat data showed Romania posted the highest annual inflation rate among the European Union member states for seven months in a row this year.

Romania’s sovereign 10-year bonds yield, a barometer for the cost of financing in the economy, reached this year a 4-year high of more than 5 percent, amid growing concerns regarding the health of public finances.

“Especially for longer term bonds, there is a residual risk that the additional supply will put upwards pressure on bond yields. The MoF nevertheless still has the option to refuse exaggerated bids or to scale back issuance amounts in practice, as they have done in the past,” Braun Erdei added.

Last year, Romania recorded a public deficit of 2.9 percent of GDP, according to Eurostat, compared with deficits of 1.7 percent of GDP in Poland, 1 percent in Slovakia, 2 percent in Hungary.

The Czech Republic and Bulgaria have posted budget surpluses in 2017.

A recent BR Analysis showed that Romania looks out of the region with its large external and fiscal deficits.

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