July 2004
The Executive Board of the International Monetary Fund (IMF) approved on July 7 a 24-month Stand-By Arrangement for an amount equivalent to SDR 250 million (about US$367 million) for Romania . The Romanian authorities do not intend to make any drawings since they are treating the arrangement as precautionary.
Romania 's previous Stand-By Arrangement with the IMF for a total amount equivalent to SDR 300 million (about US$440 million) expired on October 15, 2003 (see Press Release No. 03/171 ). On April 12, 2004 , the Executive Board reviewed Romania 's experience with Fund-supported programs since the early 1990s, under the new guidelines on assessments of countries with a longer-term program engagement (see Public Information Notice No. 04/44 ).
Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and Acting Chair, said:
"The Romanian authorities are to be commended for their sound macroeconomic policies and progress in structural reforms, which have contributed to continued disinflation and robust GDP growth in 2003. The authorities' program—supported by a new Fund arrangement, which the authorities intend to treat as precautionary—aims at strengthening the external current account balance, further reducing inflation, sustaining rapid GDP growth, and preparing the economy for EU accession. The program emphasizes continued prudent macroeconomic policies and progress with wide-ranging structural reforms.
"Key stabilization policies are a reduction in the general government budget deficit, a strengthening of the finances of state-owned enterprises through energy price adjustments and wage restraint, and measures to contain credit growth. Wage restraint by state-owned companies and a prudent statutory minimum wage policy will help to keep economy-wide wage growth in line with productivity growth. The program includes efficiency-enhancing adjustments in fiscal revenue and expenditure. Further cuts in social security taxes are envisaged, together with measures to broaden the tax base and improve tax administration. However, the successful VAT and profit tax reforms would be put at risk by introducing exemptions, which would create new distortions and undermine tax administration. Prioritization of expenditure will help finance investment in infrastructure.
"Monetary and exchange rate policies will continue to aim at striking a balance between reducing inflation and maintaining Romania 's external competitiveness. The authorities are intensively preparing for the introduction of inflation targeting, and an important step in this direction was the approval of the new central bank law strengthening the central bank's independence. Supervisory procedures and regulation have been strengthened to stem the risks arising from rapid growth in credit to households, and the authorities stand ready to take further measures if necessary.
"The authorities are confronting the long-standing issues of tax arrears and nonpayment of utility bills by large loss-making state-owned enterprises. The largest loss-makers will be downsized, and employees will be assisted in retraining and relocation. Notable progress has been made in privatization, with future efforts concentrating on the energy sector. Particularly encouraging is the authorities' strong commitment to privatize Petrom, the largest company in the country.
"With the passage of a number of new and amended laws, the authorities have started an overhaul of the judicial system, which will contribute to improving the business climate, strengthening the judicial system's independence, and improve the capacity to address the problem of corruption," Ms. Krueger said.
ANNEX
Recent Economic Developments
Under the most recent Stand-By Arrangement, macroeconomic imbalances were reduced through tight fiscal policy, strong measures to improve the financial performance of state-owned enterprises, and accelerated privatization. Between 2000-03, Romania 's GDP growth averaged about 4.5 percent and is estimated to reach 5 percent in 2004. The National Bank of Romania (NBR) gradually reduced the depreciation rate and achieved substantial disinflation, lowering the annual inflation rate to 12.3 percent in May 2004 from 40 percent in early 2001.
Macroeconomic stabilization, which preserved the competitiveness achieved with the 1999 depreciation, and improved prospects for EU accession created a positive supply response, strengthening industrial production and exports. In 2003, however, domestic demand strengthened and the current account deficit widened to almost 5.9 percent of GDP. Fiscal policy provided continued support for macroeconomic stabilization. The successful value-added tax (VAT) and profit tax reforms, improvements in tax administration, and savings on interest payments helped reduce the budget deficit relative to GDP to 2.3 percent in 2003 from 2.6 percent in 2002.
Improved confidence of banks and households, and a lower perception of country risk premium led to very rapid credit growth of about 55 percent in real terms in 2003. Consumer and mortgage credit tripled in real terms, albeit from a low base, while corporate credit also remained strong. However, the tightening of eligibility criteria for consumer and mortgage credit in early 2004 was successful in mitigating credit expansion.
Following a decade of slow privatization, the privatization of large state-owned companies accelerated in 2003 and 2004, following the implementation of a large-scale employment reduction program to attract investor interest. Moreover, after several delays, a number of important privatization projects in the energy sector are now close to completion, including the privatization of Petrom, the largest company in the country.
Program Summary
The Romanian government aims at strengthening macroeconomic stabilization and structural reforms in the run-up to EU accession in 2007. The program is designed to address the recent surge in the current account deficit, rapid credit growth, and the need to bring inflation to single digits. Fiscal consolidation and measures to contain credit growth will be crucial for containing domestic demand.
The fiscal stance of the broad public sector (general government and state-owned enterprises) will be tightened relative to GDP by 1¼ percentage points compared with the 2003 outcome. Credit growth is expected to slow to about 35 percent in real terms on average, which will help moderate domestic demand. As a result, the external current account deficit in 2004 is projected to decline by ¾ percentage points to 5¼ percent of GDP relative to 2003, while end-2004 inflation would be lowered to 9 percent from 14.1 percent at the end of 2003.
The authorities will reduce the 2004 general government deficit ceiling to 2.1 percent of GDP, compared to 3 percent of GDP in the approved budget. Owing to very strong revenue performance, this reduction can be achieved exclusively by saving surplus revenue, which the authorities estimate at 0.9 percent of GDP. Energy price adjustments and wage policy will be the main instruments for improving the state-owned enterprises' financial position.
Monetary policy will focus on lowering inflation to single digits in 2004. The current exchange-rate-based framework remains appropriate, and the NBR will use both interest rate policy and selective market interventions to steer the exchange rate consistent with the inflation target and a modest real appreciation. However, the authorities will need to remain vigilant in keeping the current account deficit well within safe margins. While fiscal policy would have to lead this process, the NBR would closely watch credit growth and implement additional measures if necessary.
On the structural side, the priorities are accelerated privatization—including the privatization of Petrom, measures to arrest the accumulation of arrears, and improved governance. The authorities are intensifying efforts to improve collections of the main utilities. The program provides for further decisive steps to increase domestic gas producers' price toward import parity by 2007 and adjust electricity prices. The authorities will initiate decisive restructuring in the large loss-making mining and railway sectors, responsible for the build of arrears to the budget and energy suppliers.
The authorities are making significant efforts to improve governance and the agreed program includes conditionality for judicial reform, including the strengthening of judicial independence. Further measures aim at improving the business climate by strengthening the office of the special anticorruption prosecutor, increasing transparency on issues of privatization and financial disclosure, and enforcing tax collections.
Romania : Main Economic Indicators, 2000-2004Q1 |
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|
2000 |
2001 |
2002 |
2003 |
2004 Q1 1/ |
|
(year-on-year real growth unless indicated otherwise) |
||||
|
|
|
|
|
|
GDP |
2.1 |
5.7 |
5.0 |
4.9 |
6.1 |
|
|
|
|
|
|
Final domestic demand |
2.1 |
6.9 |
3.5 |
7.3 |
7.9 |
Total consumption |
1.5 |
6.3 |
2.4 |
6.9 |
8.1 |
Gross fixed capital formation |
5.5 |
10.1 |
8.2 |
9.2 |
7.3 |
|
|
|
|
|
|
Net exports (contribution) |
-2.3 |
-3.1 |
0.9 |
-2.8 |
-1.1 |
Exports of goods and services |
23.4 |
12.1 |
17.6 |
11.1 |
10.2 |
Imports of goods and services |
27.1 |
18.4 |
12.0 |
16.3 |
12.4 |
|
|
|
|
|
|
Current account |
-3.9 |
-5.5 |
-3.4 |
-5.9 |
-0.5 |
(percent of annual GDP) |
|
|
|
|
|
|
|
|
|
|
|
12-month inflation (eop) |
40.7 |
30.3 |
17.8 |
14.1 |
11.8 |
|
|
|
|
|
|
Official reserves (eop, US$ million) |
3466 |
5090 |
6975 |
7994 |
8303 |
(sources: National Institute for Statistics; Ministry for Economic Development and Forecasting; and IMF Staff projections ) |
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1/ Preliminary data and staff estimates. |
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New real estate projects of millions of Euro in the Capital
The investors' interest in the Bucharest real estate market is on the rise, as in the past week alone projects worth several million Euro were announced. Thus, Impact Bucharest group announced it would acquire over 30 ha of land for USD 6.1 M, in order to develop, in the Capital city's Northern part, ten real estate projects worth a total EUR 90 M.
The price paid by Impact for each sqm exceeds USD 20.
“Located in the Northern part of the city and in Otopeni, the tracts of land are included in the asset portfolio of company Fondamento Forte, owned by several foreign investors. By taking over the entire share capital of the company, Impact will become the owner of the respective land. Over 30% of the transaction value will be supplied from Impact's own funds, the balance to the amount coming from bank loans,” Impact chairman Dan Ioan Popp stated. Impact is one of the leading real estate developers in Romania . The company sold in 2003 assets totaling over EUR 27 M, and reported net profits of ROL 192.11 bn, corresponding to total revenues of ROL 725 bn. In the first quarter of the year, the turnover went up approx. 80%, to ROL 127.1 bn, whereas net profits reached ROL 25.3 bn, as opposed to ROL 6.2 bn in the corresponding period of 2003.
Also this week, real estate company Rom International Service announced that “an individual investor” allotted EUR 5 M to construction of a residential building in the Herastrau Park area in Bucharest , without disclosing the investor's name. “ Herastrau Park Residential Building ” will have underground garages, ground floor and five floors. Floors 1-4 will include 4 apartments each, whereas Floor 5 will be made up of 5 apartments.
The area of each apartment ranges from 100 to 276 sqm, and prices will vary from EUR 110,000 to 295,000. Construction works were launched last November and will be finalised in 2005.
On the other hand, early this month Ion Tiriac Commercial Bank (BCIT) announced it would receive from the Netherlands Financial Development Company (FMO) a long-term credit line worth EUR 10 M, to be channeled into housing credits for population. FMO is one of the most important European investment banks, focusing on financing the private sector in emerging countries. FMO is rated by Standard&Poor's as “AAA.” “The Romanian real estate credit witnessed a remarkable boost lately, and we believe the further growth potential in this segment to be still important. Tiriac Bank has recently launched the Acasa credit. Easy access to our product means the bank's accepting the family income in installment calculations, requesting no guarantors and offering customers the possibility to pay installments in any of the bank's offices. We are happy to have managed to build a long term co-operation with FMO,” BCIT chairman George Toma Mucibabici stated.
(source: Nine O'Clock )
Industrial output rises by 4.5 %
The industrial output January through May 2004 was by 4.6 percent higher than in the year-ago period, the National Statistics Institute says. In April 2004 the industrial production rose by 5.2 percent from April 2003.
The total turnover of the industrial companies was January through May 2004 by 10.5 percent higher, in real terms, than in the same period of 2003.
January through April 2004, the turnover of the companies active in retail (with the exception of the trade with vehicles) rose by 15.1 percent on the year-ago period, with big rises reported for non-food products.
(source: Nine O’Clock)
Electrica Banat and Electrica Dobrogea have become Enel property
Italian company Enel yesterday became the majority shareholder of electricity distribution companies Electrica Banat and Electrica Dobrogea. Enel’s Vice-President Vicenzo Cannatelli and Electrica’s General Manager Nicolaie Coroiu yesterday signed the privatisation contract for two of Romania’s electricity distribution companies. Attending the signing ceremony were Italy’s Ambassador Stefano Ronca and Minister of Economy and Trade Dan Ioan Popescu.
The value of the transaction is EUR 111.8 M, of which EUR 69.1 M for Electrica Banat and EUR 42.7 M for Electrica Dobrogea. The privatisation method of the two companies consisted in the sale of a 24.62% stake and then the concomitant increase in the share capital, so that the investor hold 51% of the share capital. In addition to the sums paid for the majority stake, Enel took over the debts of the two companies of almost EUR 100 M. “The price is very good, given the moment of privatisation and the companies privatised. We made sure that following the privatisation the impact on energy price should not be too high. If we had accepted a higher increase in tariffs we could have obtained a higher price,” said Economy Minister. The privatisation of the 2 companies with one of the most important relevant companies in Europe is, in Minister Popescu’s opinion, “a guarantee on the future of the energy distribution in Romania.” “Now we are ready to start the activity and improve the efficiency of Romania’s energy distribution system,” said Vicenzo Cannatelli before signing the contract. He said that Enel is interested firstly in improving the quality of the services offered to consumers.
The Italian company is ready to make investments of some EUR 1 bn in the next 10-15 years to upgrade the two energy distribution networks in Romania. Moreover, the Italian company wants to make other investments in Romania in the future, in the sector of energy and natural gas, the Enel’s Vice-President announced as well. Italy is Romania’s first commercial partner and has the most small and medium-sized companies registered here. “For a few years also big Italian companies have started to come to Romania,” said Italy’s Ambassador to Romania, Stefano Ronca. He underscored that Enel is one of the biggest and more experienced companies in Italy.
Long but efficient negotiations
The privatisation project of Electrica Banat and Electrica Dobrogea was initiated with the assistance of the French consultant BNP Paribas. “It is a remarkable transaction for Romania and ensures a successful privatisation of the energy distribution system,” believes BNP Paribas representative Herve Hascoet. In the discussions with the potential buyers, it is not the price that was the main objective had in view by the Romanian state, but maintaining a balance between the wishes of the two sides to not increase too much energy tariffs.
According to the representative of BNP Paribas, the price obtained by the Romanian authorities is good, given the conditions of the market. He added that the negotiations with Enel started from a price of EUR 50 per client, finally reaching EUR 223 per client at Electrica Banat and EUR 220 per client at Electrica Dobrogea, a sum that includes both the debts assumed by investor and the transaction proper. The Romanian state obtained a guarantee from the World Bank on the specific regulation risks for the energy distribution, which allowed the reduction of the WACC indicator (the capital’s limited average cost) to 12% for the first 3 years and 10% for the coming period.
Tariffs will go up
The energy tariffs will go up after Enel’s takeover of the two distribution companies to be in line with the EU ones. “In the first 3 years the tariffs will go up to 4.5%, and after that the rise will be 3%,” said Dorin Mucea, adviser to Economy Minister. From the date of signing the privatisation contracts until the passage into the property of Enel of the two companies, a few phases have to be gone through, including some legislative alterations.
The property transfer is to take place by the year end. According to Cannatelli, the Italian group does not have in view major personnel cuts, even if the number of employees - some 3,600 - “seems high” as compared to Italy and other European states. Electrica Banat and Electrica Dobrogea provide electricity to some 1.4 M consumers and cover some 20% in the total of the energy distribution nationwide. The two companies registered losses last year, after posting profit in 2002. Enel is Italy’s largest utility company, with a portfolio of some 34 M clients. Last year it posted a net profit of EUR 2,509 M.
(source: Nine O’Clock)
Vehicle market up 32 pc in H1, 2004
Sales of vehicles produced and imported in the Romanian market went up in the first half of the year to 79,591 units, up 32% as compared to the corresponding period of 2003, Brent Valmar, Chairman of the Association of Automotive Producers and Importers (APIA) announced yesterday. Moreover, he said that APIA estimates point to a total sales volume in 2004 around 170,000-180,000 units. The approx. 30% rise in the auto market expected for the entire year of 2004 is mainly based on the better dynamics of the second half of year compared to H1 in all previous years.
The most important share in the motor vehicle sales in January - June 2004 is still accounted for by automobiles, with 63,465 units, i.e. 35% more than in 2003, compared to the 15,665 truck units, accounting for only a 21% growth, the APIA Chairman explained. Furthermore, the most important increase was registered in vehicle exports (+109.4% compared to 2003), sales of automobiles abroad going up 140%. Thus, exports of automobiles in the first 6 months (8,217 units) got near the level reported for the entire year 2003 (9,230 units). The 369% rise in Dacia Solenza sales almost exclusively supported the Romanian automobile exports.
Valmar listed the main elements of the positive development of the Romanian motor market, mentioning that the first half of 2004 brought about the most remarkable rise per half year since 2001. The general economic growth, mainly as a result of the drop in inflation and increasing investments, but also the development of financial products associated with the motor market boosted sales.
“Leasing and crediting financial instruments for motor vehicle purchases cover 75% of the sale volume,” the APIA Chairman pointed out. Moreover, funds allocated to advertising motor vehicle products doubled in the first half of 2004 as opposed to last year, reaching approx. USD 24 M, i.e. USD 373 allotted to advertising each unit sold. Over half of the money invested in promoting the motor market (USD 15.3 M) went into TV advertising, as opposed to the USD 8 M invested in this respect in 2003. Still, worth noticing is the 253% rise in the amount invested in radio advertising (USD 1.4M) and the doubling of funds allotted to print advertising (USD 3.9M).
As far as the vehicle output goes, it advanced by 43.4% on the whole. Thus, domestic automobile output went up 50% compared to the corresponding period of last year, after having dropped 2.7% in the first half of 2003 compared to 2002. On the other hand, the output of pick-up and heavy trucks doubled since last year, getting close to 12,000 units.
Vehicle imports in the first half of the year totaled over 31,000 units, going up 38.2% compared to 2003. The development of the Romanian vehicle market is even more obvious in this respect if we compare the current market with the one 6-7 years ago, when only 6,000 vehicles were imported per year, Valmar added.
In the top of the best selling brands in Romania, after the domestic ones - Dacia (38.4%) and Daewoo (22.2%), ranking first and second - third comes Renault (7.4%) and Skoda (5.7%), just like last year, followed by Peugeot (4.4%) and Volkswagen (4.2%), which this year switched places. New comers in the standings are Fiat (1.5%), Hyundai (1.3%) and Chevrolet (1.2%), along with the older presences of Opel (2%), Ford (1.9%) and Toyota (1.6%). In the model standings, Renault Clio continues to be the first (2,181 units), followed by Renault Megane (2,047) and Skoda Octavia (2,033).
(source: Nine O'Clock )