Cee money romania govt measures may complicate imf talks

← Homepage

* New government has already delayed privatisations* Delays to new IMF deal could hit currency, debt* Romania has substantial 2013 funding needsBy Luiza IlieBUCHAREST, Jan 10 Emboldened by a recent landslide election victory, Romania's leftist government has been taking steps that could complicate talks over a new aid deal with the International Monetary Fund. Romania needs a new deal with the IMF to shore up investor confidence in an economy undermined by rocky politics, even though it says it would only use the funds in an emergency. Its current programme expires in March, and any gap without a financial backstop arrangement could send its borrowing costs higher and the leu currency to a new record low. Given the European Union country's success in cutting its budget gap, there should in theory be no problem in replacing its current 5 billion euro ($6.5 billion) IMF deal. But disagreement over long-term measures - like health reform and privatisations - could cause delays. The new government has already passed a law postponing several privatisations by a year. It has also split the Finance Ministry into two entities without defining their responsibilities. These moves are likely to complicate talks when the IMF, which has grown increasingly impatient over structural reforms, begins a review of its Romanian programme next week."We believe negotiations will ultimately lead to a new deal as officials realise this is the best option," said Vlad Muscalu, senior economist at ING in Bucharest.

"But negotiations may run long, and there are risks that the series of aid deals will be temporarily interrupted. There is also a possibility the government will not go for a deal."Prime Minister Victor Ponta ran the government for most of 2012 before winning the December election and is well on target to bring the budget deficit down to under 3 percent of gross domestic product, the top condition of Romania's s current deal. A new IMF agreement was a central plank of Ponta's governing programme, although he has voiced concern before about the measures the fund wants to see implemented."Not everything the IMF and the European Commission ... suggest is perfect," he said in late December."We have a duty to negotiate. But it is extremely important to have a deal for now because Romania is in a storm with the rest of Europe."The government is keen to avoid the fate of the previous rightist cabinet, which cut wages and raised the sales tax to stay on track with the IMF, only to be hammered at the polls.

Measures like selling state assets and introducing higher payments for healthcare would erode support for Ponta's government."I don't think much will happen in terms of reforms, so the question is, can the IMF swallow that?" said Daniel Hewitt, emerging Europe economist at Barclays Capital. NEW DEAL PRICED IN Markets have priced in a new deal after Ponta's election win, which would bring more political stability to the EU's second-poorest member. The country had four governments in 2012 and saw a failed attempt to impeach the president.

Yields on three-year paper have fallen nearly 50 basis points to 6.14 percent since the Dec. 9 ballot, and demand has risen along the curve, while the leu currency has firmed up to an eight-month high of 4.399 per euro. But delays or failure to win IMF support could send the leu to new record lows, hurting the two-thirds of borrowers with loans in foreign currencies such as euros, as it would drive up monthly payments. It would also send government borrowing costs back to their pre-December levels."If the third deal requires structural reforms and transparency, it might be hard to reach an agreement, and without it the leu could go to 4.7-4.8 over a few months," said one trader in Bucharest. Romania also has large 2013 borrowing needs, and no IMF deal would mean it has a harder time raising money. It has to pay back 5 billion euros from a previous IMF bailout, and the Finance Ministry needs roughly $19 billion to cover both maturing debt and its budget deficit, according to bank ING. REGIONAL LAGGARD Romania does not have the same level of investor trust as its emerging EU peers Poland and the Czech Republic, and it needs the backing of the IMF and Brussels to convince more people that it is a reliable place to do business. Foreign investment was only 1.3 billion euros in the first 10 months of 2012 and the economy, still recovering after a credit bubble burst in 2009, is inefficient and bureaucratic, mainly in state hands and on the brink of another recession. Romania has more than 600 state-owned firms, which account for only 6 percent of the economy but a third of all unpaid debts. Data from independent watchdog Fiscal Council showed in 2011 that they employed close to 10 percent of workers, but owed unpaid taxes to the state worth 2.4 percent of GDP. Analysts say the IMF will also likely want to see real action in reforming these state firms. ($1 = 0.7654 euros)