Romania

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Romanias Economic Program Supported by the IMF,
EU, World Bank, and other IFIs

• by
• Tonny Lybek
• IMFs Resident Representative in Bulgaria and
  Romania
• tlybek_at_imf.org
• at
• Norwegian Cooperation Program
• Bucharest
• December 4, 2009

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Agenda

• I World Economic Outlook
• Uneven signs of recovery but no time for
  complacency
• II Regional Economic Outlook
• From excessive credit growth to a credit crunch
• III Romanias Economic Program
• IV Conclusion

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I.1 The Global Crisis

• Deepest global recession since the 1930s
• In 2009, world growth is expected to decline (1.1
  percent) for the first time in 60 years!
• International trade declined
• How long will it last?
• Financial shock
• No obvious locomotive
• Positive signs, but no time for complacency!
• Normalization of activity, re-stocking
• Unemployment and Non-performing loans lagging
• Cautious exit of anti-crisis programs
• (http//www.imf.org/external/np/g20/11070
  9.htm)

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I.2 World Economic Outlook
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II.1 Central and Eastern Europe

• The Good Times 200307Catching-up
• Vulnerabilities were building-up!
• Private sector imbalances growing rapidly!
• Increasing current account deficits
• Increasing exposures to Western banks
• Public finances looked much better than they
  were!
• Convergence process not fully appreciated!
• Crisis came late to the region
• Initial denial made it difficult to take early
  action!
• The five stages Denial -gt
• 
  Resentment -gt
• 
  Bargaining -gt
• 
  Depression -gt
• 
  
  Acceptance!
  
  

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II.2 Impact of The Global Crisis

• Shock I Lower external demand
• Shock II Slowdown in capital inflows
• Foreign direct investment (FDI)
• Funding ofmainly foreign-ownedbanks!
• Direct borrowing by non-financial companies
• Slow-down in domestic demand
• Delaying investments, particularly construction
• Uncertainty about employment
• Slower wage growth and lower remittances
• Wealth effects (asset prices)
• Some already ripe for a home-grown crisis
• Imbalances differed among CEE countries
• Cushions differed among countries
• IMF has tried to stress differences in the region!

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II.3 Vulnerabilities and Severity of Recessions
Have Varied
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II.4 Regional Economic Outlook
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III.1 Romania A Case in Point

• Global crisis made it increasingly difficult to
  secure external financing
• Large short-term private debt
• Large fiscal imbalances even in good years, make
  financing challenging during a recession
• gt Emerging credibility problem!
• gt In need of a safety belt!!

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III.2 Romanias Package

• Joint package supporting Romanias program!
• Size of the safety belt (20 billion over 2
  years)
• IMF May 4 24-month Stand-By Arrangement with
  exceptional access 12.95 billion (1110.77 of
  quota). Interest rate about 3½ and repayment
  over 35 years.
• EU May 5 ECOFIN Council approved the
  framework for a 5 billion loan, a maximum of
  five installments over 24 months (on top of
  pre-and post-accession funds and the advance
  payment of structural funds in 2009). Interest
  rate is libor spread and an average maturity
  of maximum 7 years.
• World Bank 200910, 3 DPLs of total 1
  billion. Interest rate will depend on the
  maturity, currency, and if fixed or floating
  rate.
• EBRD and other multilateral IFIs (EIB) various
  projects, about 1 billion.
• Half of second tranche to help finance the
  budget deficit
• Budget support

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III.3 Romanias Economic Program

• A European Bank Coordination Initiative
  foreign-
• owned banks remain committed to Romania!
  
• B Government addresses fiscal imbalances
• Fiscal consolidation ensure sustainability!
• Improve fiscal governance ensure predictability!
• C NBR continues to maintain sound banking
  system
• Ensure prompt and early action
• D Price stability remains primary objective of
• monetary policy (inflation-targeting)

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III.4 Secure External Financing

• Potential financing gap
• Current account deficit
• Capital account
• Roll-over assumptions
• Reserves to exceed 100 of short-term debt!
• European Bank Coordination Initiative
• Nine largest foreign-owned banks committed to
• (i) maintain exposure to Romania, and
• (ii) increase capital in line with stress tests
• Vienna meeting on March 26, 2009
• Brussels meeting on May 19, 2009
• Bucharest meeting on August 6, 2009
• Brussels meeting on November 18, 2009

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III.5 Ensure Fiscal Sustainability

• Budget deficits March adjustment 1.1 of GDP
• August
  adjustment 0.8 of GDP
• March
  August
• 2009 -4.6 -7.3
• 2010 -3? -5.9
• 2011 better than-3 -4.3
• Public salaries
• Protect most vulnerable groups
• Arrears of general government
• Government guarantees
• Balance following factors
• Back on a sustainable path
• Realistic financing
• Avoid excessive cuts exacerbating the recession

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III.6 Ensure Fiscal Predictability

• Improve tax administration
• Restructuring of the public agencies
• Increase accountability of local authorities
• Better monitoring and control of public
  enterprises
• Unitary Public Pay Law
• Simplified pay scale, reduce reliance on bonuses
• More transparent
• Equity
• Save resources
• Implementing legislation to be adopted in 2010!
• Fiscal Responsibility Act
• Pension Reform
• New legislation

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III.7 Fiscal Responsibility Law

• Objective achieve and maintain medium-term
  fiscal discipline!
• Further improve transparency and responsibility
• Coverage entities fully or partially financed
  through the consolidated general budget
• Also local governments and self-financed units
• Multi-year fiscal framework rolling 3-year
  fiscal strategy submitted to Parliament in May
• Ensure predictability
• New expenditure proposals to show fiscal impact
  and revenue sources
• Independent fiscal council
• Submitted to Parliament by end-Novemberv

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III.8 Pension Reform

• Objective ensure long-term sustainability!
• Broaden contribution base
• Better relate pensions to contributions
• Gradually index to inflation instead of wages
• Retirement age gradually increase and equalize
  for women and men
• Draft is in good shape, although some issues to
  be further discussed

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III.9 Maintain Sound Banking System

• Maintain strong capital buffers
• Stress tests (prior action)
• Maintain 10 percent capital adequacy ratio (CAR)
• CAR at end-September was 13.7
• In EU context, facilitate resolution procedures
• E.g., strengthen authority of special
  administrator
• Strengthen deposit insurance

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III.10 Monetary Policy

• Maintain inflation-targeting framework
• IT-targets within official range (3.5 1)
• Quarterly path
• Review
• Only gradually easing if conditions permit
• Required reserves
• Interest rates
• Maintain a floating exchange rate regime

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III.10 Selected Indicators

• Real GDP, prel. -7.4 (Q1Q3
  2008 to Q1Q3 2009)
• Unemployment, reg. 7.3 (s.a. Sep 2008
  to Sep 2009)
• Inflation, CPI 4.3 (Oct 2008 to Oct 2009)
• Exports (value in ) -18.3 (Q1Q3 2008
  to Q1Q3 2009)
• Imports (value in ) -36.0 (Q1Q3 2008
  to Q1Q3 2009)
• Industrial output -8.5 (Q1Q3
  2008 to Q1Q3 2009)
• Housing prices, anecdotal information

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III.11 Market Reactions
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IV Conclusion

• Global financial crisis is deep, but has been
  mitigated by coordinated global measures!
• Those with smallest imbalances and largest
  cushions have been least affected.
• Romanias economic program is supported by the
  IMF, EC, WB and other IFIs.
• We continue to work closely with the Romanian
  authorities.
• IMF documents available on www.imf.org and also
  in Romanian on www.fmi.ro

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Thank you very
much for
your
attention