BR Analysis. Romania’s government faces increasing challenges to borrow money even if it pays the highest interest rates in EU

Sorin Melenciuc 05/06/2018 | 11:26

Romania’s government finds increasingly difficult to borrow the money it desperately needs to cover its ballooning spending, even if it already accepts to pay the highest interest rates in the European Union, amid growing concerns regarding the health of public finances.

In May, the Ministry of Finance borrowed only RON 1.9 billion from the lenders, half the projected amount (RON 3.4 billion), and June started with another bad news.

On Monday, Romania’s sovereign 10-year bonds yield, a barometer for the cost of financing in the economy, reached a fresh 4-year high of 4.85 percent, up from 4.84 percent at the end of last week.

Moreover, at the first auction of this month, Romania’s government borrowed on Monday only RON 231 million out of the announced amount of RON 500 million, even at an annual interest rate of 4.78 percent.

The main reason was the poor demand from the lenders, of only RON 410 million, according to central bank data.

Experts warn more bad news is coming.

“We expect the upward trend in interest rates to continue on short-term government securities, against a backdrop of the prospects for maintaining post-crisis monetary cycle in the United States (impacting on the cost of global funding) and the intensification of internal challenges,” Banca Transilvania analysts said in a research note on Tuesday.

Public spending bonanza

These challenges in borrowing money come in the worst moment for the Romanian government, which desperately needs money to cover its ballooning spending.

Finance Ministry data showed that Romania’s consolidated budget ran a deficit of RON 6.05 billion – 0.65 percent of gross domestic product (GDP) – in the first four months of this year, compared with a surplus in April 2017.

Total budget revenues rose by 11.8 percent year-on-year in January-April 2018, but were largely outpaced by expenses, which increased by 22.5 percent, raising concerns about the sustainability of public finances.

Economists suggest that the government should cut spending in order to keep the public deficit under control.

“With the economy growing below government expectations and ballooning quasi-permanent spending, the mid-year budget revision could be rather ample, provided the government remains committed to the -3.0 percent of GDP budget threshold,” ING analysts pointed out in a recent report.

Experts are particularly concerned about the rapid increase of government’s interest expenses. Official data show that interest expense rose by 56.2 percent during the first four months of this year, to RON 5.06 billion, from RON 3.24 billion in January-April 2017.

Economists warn higher borrowing cost quickly translates into higher public debt.

“The main advantage of the country is its low level of public debt, but this can be reversed in the medium term unless a prudent policy mix is implemented, including a gradual return to MTO,” Romania’s central bank deputy governor Liviu Voinea said recently at CEPS-IMF Spring 2018 Regional Economic Outlook in Brussels.

Romania’s gross public debt declined last year to 35 percent of Gross Domestic Product (GDP), down from 37.6 percent of GDP in 2016, due to the rapid growth of the economy, which outpaced the increase in the debt, Ministry of Finance data show.

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