Romania’s government plans to borrow EUR 2.5 billion from foreign investors amid worries about fiscal policy

Romania’s government plans to borrow EUR 2.5 billion this year from foreign investors in order to finance public expenses, amid worries about fiscal policy and political situation.

In 2018, the Ministry of Finance (MoF) has borrowed EUR 2 billion in February and USD 1.2 billion in June.

But Romania’s government needs more money to finance larger expenses and higher public deficit.

According to an order published in Romania’s Official Gazette, the Ministry of Finance plans to launch government bonds on the international sovereign bond markets this year. The issuance is managed by a consortium including BNP Paribas, Erste Group, ING Bank, Societe Generale and UniCredit.

This year, 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.

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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.

More money needed

A recent BR Analysis showed that Romania’s 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.

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.