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.
On Thursday, two tenders for T-bills and sovereign bonds failed as investors showed little interest to finance the Romanian government.
The first tender, of RON 500 million 1-year T-bills, failed entirely as investors offered only RON 209 million and asked high interest rates, pushing the Finance Ministry to reject all bids.
The second tender, for RON 400 10-year bonds, failed partially as the Finance Ministry attracted RON 389 at higher cost than at the previous same-maturity tenders.
On Wednesday, the Finance ministry tried to secure a EUR 100 million loan from investors but achieved to attract only EUR 83.5 million at higher interest rates, of 0.97 percent per annum.
Last week, a RON 400 million June-2023 auction went also poorly, with total demand of RON 328 million spread in a rather wide range.
The Ministry of Finance allocated RON 249 million at a 4..41 percent average and 4.43 percent maximum, while the average of rejected bids was 4.45 percent. – considered by analysts “a weak auction both demand-wise and yield-wise.”
A recent BR analysis showed that the Romanian government is being hit by the “invisible hand” of the market as its borrowing costs jump more than social spending.
Romania’s sovereign 10-year bonds yield, a barometer for the cost of financing in the economy, reached last year a 4-year high of more than 5 percent and is now again on a rising trend amid growing concerns regarding the health of public finances.
New taxes but no budget
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.
Experts say that capping internal natural gas prices will hit hard the two main gas producers in Romania, Romgaz and OMV Petrom, and will limit investment in gas fields, while the advantages for retail consumers are only for short term.
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.