Download Report on the economic and budgetary situation

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MINISTRY OF PUBLIC FINANCE
Report on the economic and budgetary situation over the first six months of 2010
I.
Recent macroeconomic developments
The economic growth remained negative in Q1 2010. in real terms by 0.3% smaller compared
to Q4 2009 (seasonally adjusted data). Compared to Q1 2009, GDP went down by 2.6% gross series
and by 3.2% seasonally adjusted series. This reflects the weak domestic demand in this interval, and
the bad weather at the end of the year, which affected the constructions sector in particular.
According to early statisctic estimates for Q2 2010, GDP went up by 0.3% compared to Q1 2010
(seasonally adjusted data), but in went down by 0.5% compared to Q2 2009 (gross data series).
Hence, in the first half of 2010, GDP went down by 1.5% compared to first half 2009 (gross
series).
For the whole year, the GDP decrease is estimated – in real terms – at 1.9%, compared to the
1.3% increase taken into account at the time when the initial budget was substantiated.
8.0
- annual change % -
7.3
7.1
4.0
0.0
1.3
-1.9
-4.0
-7.0
-71
-8.0
2008
2009
Initial budget
2010
Budget revision
The reassessment takes into consideration the budget balancing measures and the direct and
circumstantial implications, of the temporary measure of cutting pensions by 15% compensated by the
VAT increase by 5 pp. In addition, the foreign circumstances, not quiet favourable, along with initial
projections, made the reassessment necessary. VAT increase is a general measure which, unlike the
pensions cut affects all the incomes of the population. Therefore, there is a strong impact on the
household consumption.
In addition, the effect of bad weather conditions on the farming output over the last two
months were considered, as these led to an important contraction of cereals and the vegetable crops.
The performance of industry, domestic and foreign trade in the first half of the year required
adjustments in the GDP components. Domestic demand will drop in particular as a result of lower
household consumption and the consumption of the public administration.
Household consumption will go down by 3.4% this year compared to the increase by 3.7% in the
macroeconomic framework of the initial budget, the government consumption will drop by 4.5%
compared to a decrease by 3.5%, while the gross fixed capital formation will go down by 1.5%
compared to a reduction by 1% in the initial scenario.
- percentage change compared to previous year Gross domestic product
2008
2009
2010
Domestic demand, of which:
- Actual household individual consumption
- Expenditures incurred with the population final consumption
- Expenditures incurred with the individual consumption of the public
administration
7.2
9.4
9.5
-12.8
-9.2
-10.8
-2.4
-3.4
-3.4
8.7
0.4
-4.5
- Actual aggregate consumption of the public administration
- Gross Fixed Capital Formation
Exports of goods and services
Imports of goods and services
5.4
16.2
8.7
1.2
-25.3
-5.5
-4.6
-1.5
7.0
7.8
-20.6
4.1
PIB
7.3
-7.1
-1.9
- Industry
- Agriculture
- Constructions
- Services
1.9
21.9
26.1
5.4
-4.3
-0.4
-13.6
-6.8
3.6
1.0
-15.9
-3.1
Source: 2008-2009 National Institute for Statistics, 2010 National Prognosis Commission
The foreign trade performed above the expectations in the first half of 2010. Exports of goods
in the first half of 2010. compared to the same time interval in 2009. increased by 5.8%. IntraCommunity exports of goods, which account for 73.8% of total, went up by 23.3%, and exports
outside the Community increased by 25.8%. The industry picking up required imports of raw
materials, which pushed up imports of goods by 19.3%.
Under these circumstances, FOB-CIF commercial deficit went up by 0.5%, compared to the
similar interval of 2009. and reached 4.7 billion Euros. Judging by geographical distribution, FOB-
2
CIF commercial deficit resulting from commercial trading with EU Member States went down by
9.0%, with the negative balance with partners outside EU went up by 26.1.
The current account deficit of the foreign payments balance went up by 50%, with FOBFOB commercial deficit decreasing by 7.6%, and the surplus of current transfers decreasing by
49.9%. There was a deficit in the revenues balance, decreasing by 6.6%, with the balance of service
deficit going up 4.6 times. The current account deficit was covered 50.4% from FDI, which amounted
to 1838 million Euros, decreasing by 29% compared to first six months of 2009. With regard to selfdirected sources (FDI, portfolio investments, capital transfers) the coverage was 86.3%.
Foreign trade and current account
2008
2009
2010
33 725
29 116
32 800
14.1
-13.7
12.7
57 240
38 897
41 940
11.5
-32.0
7.8
FOB Import
52 834
35 903
38 710
FOB - FOB Commercial Balance
-19 109
-6 787
-5 910
FOB - CIF Commercial Balance
-23 515
-9 781
-9 140
Current Account Deficit
-16 157
-5 168
-6 880
-11.6
-4.5
-5.7
FOB Export
- annual change in %
CIF Import
- annual change in %
- % of GDP
million
Euros -
Source: 2008-2009: National Institute for Statistics and National Bank of Romania; 2010: National Prognosis Commission
Considering the trends of the foreign sector in the first months of 2010, and the economic
performance of our main foreign partners, the foreign trade was revised in the sense of increasing the
growth pace of exports of goods this year up to 12.7% compared to 3.5% as in the initial projection,
with the imports of goods from 4.2% to 7.8%.
The current account deficit is projected to go up compared to the initial version, both in
amount (6.9 billion Euros compared to 6475 billion Euros), and in share to GDP (5.7% compared to
5.1%), in particular looking at a significant decrease of the positive balance of current transfers.
In June 2010. the annual inflation rate went up to 4.38%, by 0.36 pp below the end of 2009.
Disinflation continued mainly due to the demand gap, and the appreciation of the domestic currency
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against the euro, two factors which attenuated the impact of excise duties going up in the first month
of the year.
Compared to December 2009. the increase of consumer prices in June this year was 2.77%. In
this time interval the non-food prices faced inflation pressures and went up by 4.80% compared to
December 2009. Over 65% of non-food price increase occurred in January as a result of the increased
excise duty rates and the higher exchange rate used to calculate this rate.
Over the first six months, the contribution of excisable goods prices (tobacco, fuels and
electricity) to the inflation calculated compared to the end of previous year was 1.44 percentage
points. The food prices and services tariffs performed weakly (+0.71% food and +1.79% services).
In 2010, the inflation rate is projected to go up to 7.9% compared to the end of year 2009 which
is higher by 4.4 percentage points compared to the projection used in building the 2010 budget. The
higher inflation rate in the second half of the year will come from the increased VAT rate from 19% la
24% as of July 1. and the Euro depreciation in the second year half compared to first six months. This
will result in a higher price increase for imported goods, but for domestic goods and services as well,
which are connected to the European currency, as the two factors will overlap. Another factor
bringing inflation pressures may be the increase of farming goods prices, in particular grains, a trend
which can be seen already in the foreign markets. However, the reduced consumption will slow down
inflation trends in Q4.
-%Inflation and GDP deflator
2008
2009
2010
Inflation
- end of year
- annual average
GDP Deflator
6.3
7.85
15.2
4.74
5.59
2.8
7.9
5.9
6.2
Source: 2008-2009 National Institute for Statistics, 2010 National Prognosis Commission
The average number of employees in the first six months (calculated as arithmetic mean of
monthly numbers) was 4.297 thousand people, decreasing by 8.8% compared to the same interval of
2009. The most important decrease is seen in some branches of the manufacturing industry,
constructions, trade, and in some activities performed in the administration, education and health
sectors, in which the number of employees went down by 37 thousand persons.
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Difficulties in the economy will be seen throughout 2010 and will be reflected by the
developments on the labor market, with the number of employees expected to go down by 1.8%
compared to the increase by 0.9% taken into account in building the initial budget.
The number of recorded unemployed lat the end of each month in the first half of 2010 was
on an increasing trend until the month of March (+55.9 thousand persons compared to the end of year
2009. with the unemployment rate 8.36%), after that it went down. At the end of June, the number of
registered unemployed was 680.8 thousand persons, lower by 28.6 thousand persons compared to the
end of 2009, with a lower unemployment rate, namely 7.44%, compared to 7.8%. It is important that
the number of remunerated unemployed went down by 54.3 thousand persons compared to the end of
2009.
The pressures on the labor market became worse than expected at the time when the 2010
budget was built, therefore the number of registered unemployed is expected to grow in the second
year half, namely 760 thousand persons at the end of 2010 (645 thousand persons initially), pushing
up the registered unemployment rate to a maximum 8.5% (7.3% initially).
Labor Force
2008
2009
2010
5,046.3
4,750*)
4,665
3.3
-5.9
-1.8
Registered unemployed at the end of year - thousand
persons
403.4
709.4
760
- remunerated unemployed – thousand persons
143.5
435.5
455
4.4
7.8
8.5
Average number of employees (ILO) - thousand persons
- annual change in %
Rate of registered unemployment - %
Source: 2008-2009 National Institute for Statistics, 2010 National Prognosis Commission
*)
Data estimated by NPC. Final data to be published by NIS in September 2010
In the first six months of 2010, gross average wage income was higher by 5.0% compared to
the same interval of 2009, namely 1978 lei. The net average wage income went up by 4.6%, which is
above the average inflation for that interval (4.49%). In most of the competition sector the wage
income was higher in this interval. A decrease of the gross average wage income was seen mainly in
education, cultural and recreational activities, public administration and social assistance.
Measures cutting wages in the public sector resulted in an adjustments of the gross average
wage income projected in 2010 to 1910 lei, compared to 1925 lei in the initial forecast for budget
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formulation purposes. This will be higher by 1.6% compared to 2009. In real terms, the average wage
income will drop by 4.3%.
II.
2010 Budget Policy
The initial 2010 Budget (Annex 1) was built based on the macroeconomic projections at the end
of 2009, convergent with the forecast made by interbational bodies, according to which a 1.3% GDP
increase was expected, in real terms, against the background of a restrictive policy focused on
reducing the budget deficit and on structural reforms of the public wages and pension systems.
Economic growth below the expectations and the performance of budget implementation, which
in Q1 2010 went above the target agreed with IMF, trigerred more severe budget adjustments and
much shorter time limits.
As a consequence, the initial provisions regarding the total expenditures decrease compared to
2009 by 2.1 percentage points as GDP share, as well as staff and social assistance expenditures cuts,
by one percentage point each, proved insufficient and required additional adjusments focused on cuts
on the consumer expenditures side with a higher cost of public debt servicing.
Total debts of the general consolidated budget went up from 1,578.6 million lei at December
31 2009 to 1,847.1 million lei on June 30 2010. The main increase was seen in the central
administration (94.2 million lei) local administrations (77.5 million lei) and social insurance (96.7
million lei); the data is presented in the below table.
DEBTS at 30 June 2010
-million
leiState Budget, SelfFinanced and
Autonomous
31 Dec
2009
30 June
2010
Local Budgets
31 Dec
2009
30 June
2010
Social Security
Budgets
31 Dec
2009
30 June
2010
TOTAL
31 Dec
2009
30 June
2010
638.90
733.10
925.70
1 003.20
14.10
110.80
1 578.6
1 847.1
NOTE: Arrears over 90 days are included, according to the definition contained in the
agreement with IMF.
As a consequence, the Government decided to take major fiscal adjustment actions to reduce
budget expenditures, in particular expenditures with goods and services, which will be cut by 20% in
the second half of the year, as well as salaries and other entitlements of salary nature, which will be
cut by 25% from July 1 to December 31.
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Following these decisions, the revised budget was passed in August and included:

GCB deficit increased in nominal terms from 31,907 million lei to 34,641 million lei and in
relative terms from 5.9 % to 6.8% of GDP;

total expenditures cut by 0.69 billion lei compared to initial plan, bringing staff expenditure
cuts by -3.5 billion lei and reallocations of funds to social security budget (3.8 billion lei) and
unemployment budget (2.8 billion lei), as well as an increase of expenditures for goods and
services by 1.4 billion lei, due to additional funds allocated for clearing hospital arrears;

total GCB revenues reduced by 3.4 billion lei in 2010 compared to initial estimates, due to a
negative performance of GDP in 2010 decreasing from 538.9 billion lei to 511.5 billion lei, as
well as to several legal changes which will impact budget collections as follows:
-
the decrease by 0.8 billion lei of estimated revenues from profit tax, due to shrinking
economy compared to initial data used for the budget;
-
the nominal decrease by 1.1 billion lei on wage income tax and by 3.6 billion lei on
social security contributions mainly coming from the gross average wage income forecast
which was revised downwards 1,925 lei to 1,910 lei, and from the average number of
employees by 67 thousand persons (from 4,732 thousand persons down to 4,665 thousand
persons);
-
nominal increase of VAT collections by 1.4 billion lei due to the increase of VAT rate
from 19% to 24% (the measure has a positive impact of 3.5 billion lei, with the difference
coming from the downward revision of the VAB in the economy, from 481.9 billion lei to
457 billion lei);
-
decrease of revenues expected from excise duties by 2.0 billion due to the turnover
decrease in respect of excisable goods;
-
non-fiscal revenues increase by 3 billion lei, as a result of positive collections in the
first six months of 2010 (budget impact 2.5 billion lei) and the 25% cut applied to wages in
institutions fully and/or partially financed from own revenues and bonuses included in the
GCB.
III.
Budget execution over the first six months of the year
According to provisional data, GCB execution on the first six months of the year (Annex 2)
closed on an estimated deficit of 18.07 billion lei, slightly below the deficit target ceiling of 18.2
billion lei, according to the additional letter to the IMF Stand-By Arrangement.
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1. Estimated and collected GCB revenues amounted to 77.2 billion lei, by 0.1% lower than
actual data in the previous year.
Revenues collected from excise duties, non-fiscal revenues and EU reimbursements, which
increased by 1.5%, 19.3% and 121%, respectively, and the main fiscal revenues dropped (profit tax 3%, customs duties -12%, insurance contributions - 5.1%, wage and personal income tax -4.8%, VAT
-3.7%).
Compared to the approved initial plan, collections for the main fiscal revenues account for 50%
of annual estimates: 45.2% in profit tax, 46.9% in personal income tax, 46.2% in VAT, 38.3% in
excise duties.
Revenues collected from the personal income tax decreased due to the reduced number of
employees by 8.8% according to the data reported in the first half of 2010 compared to the same
interval of 2009.
VAT collections dropped by 3.7% under the influence coming mainly from collection from
domestic operations decreasing by 5.3% as a result of a reduced turnover in wholesale and retail
sectors.
For excise duties, collections are higher by 1.5% compared to the same interval of the previous
year, after the taxation rate increased on January 1 this year. Collections increased on the back of a
14.2% raise of the average Lei/EUR exchange rate taken into account for the calculation of excise
duties in 2010 and the excise duty rate increase for unleaded gas, diesel oil and natural gas intended
for household consumption, as well as intermediary alcoholic products, cigarettes and electricity, in
the first half of 2010.
Insurance contributions in GCB dropped by 5.1% compared to the same interval of 2009, due
to the reduced number of employees and lower voluntary compliance, while the average social
security budget contributions raised by 0.27 percentage points starting with revenues collected for
February 2010.
EU reimbursements for payments incurred under European-funded projects went up by 921
million lei, compared to the same interval of 2009; however, these account for only 46.5% of initial
annual estimates.
Non-fiscal revenues raised by 1.422 million lei following the collection of SOEs dividends and
funds form NBR net profit transferred to the state budget.
2. GCB expenditures in amount of 95.3 billion lei, went up in nominal terms by 4.0% compared
to the previous time interval.
8
Staff expenditures dropped by 4.5% in GCB, but they increased in the state budget by 3.7%
following the reclassification to the state budget of several self-financed or subsidized institutions as
of November
5 2009, pursuant to Law nr. 329/2009 on the reorganization of several public
authorities and institutions, streamlining public expenditures, supporting the business environment
and observing the agreements with the European Commission and IMF.
However, compared to initially approved plans, the actual data for some of the main budget
holders (Annex 3) account for more than 50% of approved annual projections: the Senate (58%),
Chamber of Deputies (53%), GSG (54%), Ministry of Regional Development and Tourism (60%),
Ministry of Agriculture and Rural Development (59%), Ministry of Heath, (56%), Special
Telecommunications Service (53%), Romanian Academy ( 54%).
The staff expenditures share is quite high, compared to annual plans (52.1%). However, the
increase pace of these expenditure will slow down in the second year half following the measures to
be taken by the Government as of July 1 2010, in particular the 25% of wages in the public sector and
the reshuffling of administrative staff at central and regional levers and the continuation of the process
aimed at cutting the number of surplus staff.
Expenditures with goods and services dropped by 1.7% compared to the same interval of 2009.
The decrease was mainly seen in the state budget (- 28.7%) while in the local budgets these are higher
in the same interval by 9.7%. However, the decreasing trend at local government level continued, and
the increase was by 1 pp below the end of May.
Interest expenditures went up by 21.6%, as a result of higher budget deficits accumulating from
previous years and the loans contracted to cover those deficits. Therefore, the primary deficit went up
compared to the previous interval, from 11.4 billion lei to 14.5 billion lei.
Expenditures incurred for the EU-funded programs went up by 132.6% compared to the
previous interval; however, initial annual projections for the state budget were achieved 35%.
Investment expenditures which include capital expenditures and transfers to development
programs amounted to 11.7 billion lei, decreasing by 10% compared to the same interval of the
previous year.
Annual appropriations from the state budget for capital expenditures were used 36.4%, and those
from local governments 29%.
9
For most MBH the actual use of these earmarked funds was very low: Ministry of Agriculture 20%, Ministry of Regional Development and Tourism - 25%, Ministry of National Defense - 34%,
Ministry of Interior - 40%, Ministry of Environment - 38%.
Social security budgets performance significantly slowed down compared to the previous
interval and compared to initial projections approved for 2010.
-million leiInitial Plan
Achievements
Achievements
2010
1.01 - 30.06.2009
1.01 - 30.06.2010
41,315.9
17,189.1
20,509.5
7,056.1
447.5
4,237.9
41,060,2
19,740,1
21,307.6
255.7
-2.551.0
-798.1
Revenues
1,819.8
684.2
696.4
Expenditures
2,964.7
1,124.3
2,250,8
-1,144.9
-440,1
-1,554.4
15,865.3
7,381.1
7,000,6
1,476.5
378.2
338.7
15,725.4
7,315.2
7,581.9
139.9
65.9
-581.3
Social Security Budgets
TOTAL of which:
Social security budget
Revenues, of which :
Subsidies from the central government
Expenditures
SURPLUS(+) / DEFICIT(-)
Unemployment budget
SURPLUS(+) / DEFICIT(-)
Health insurance fund
Revenues, of which :
Subsidies from the central government
Expenditures
SURPLUS(+) / DEFICIT(-)
The unemployment budget performed particularly poor, with revenues similar to the same
interval of the previous year and expenditures twice as much as the previous year.
IV.
Budget deficit and public debt
In 2010, the Ministry of Public Finance plans a balanced coverage of the budget deficit from
domestic and foreign sources, compared to 2009 when the budget deficit was covered 68.7% from
domestic sources, in particular government securities.
In the first half of 2010, the following foreign sources were used to cover budget deficit and
refinance public debt:

50% of the IMF Loan Tranches 3 and 4 in amount of 1.1 billion SDR, namely 1.2 billion
Euros (maturity 5 years, standard IMF interest – around 2.25% according to the latest
interest payment in February 2010);
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
Tranche 2 amounting to 1 billion Euros, of the EC Loan (bullet loan, reimbursement in
May 2019 and 3.375% coupon),

Eurobond issued on the foreign capital markets (amount 1 billion Euros, maturity 5 years,
coupon 5% and yield 5.17%).
Domestic funds used to cover the budget deficit and refinance the public debt consisted of
issuances of government securities amounting to 20.8 billion lei. Of those government securities,
72% in T-Bills with maturity 6 and 12 months, and the rest of it in Benchmark Bonds with 3, 5 and 10
years maturity, including reopening of 3-year bonds (coupon 8.0%) and 5-year bonds (coupon 8.25%)
issued in 2008 and of the 10-year bond (coupon 6.75%) issued in 2007, as well as new bonds with
maturities 3 years (coupon 6.25%) and 5 year (coupon 6.0%).
Compared to the beginning of the year when the average yields of government securities ranged
between 7.88% and 9.5%, in June these dropped in average by 2 percentage points, ranging between
6.74% and 6.97%.
As of May 2010, after the Greek debt crisis, the investors – including those on the domestic
marker – became very prudent in participating to medium and long term auctions, which led to
significantly lower amounts awarded (in May the announced amount was 4,500 million lei and only
56% of it was awarded, while in June the trend become more obvious and only 21% of the announced
amount was actually awarded).
On May 31, 2010, public indebtedness was 34.9% of GDP, of which 32.8% in government
public debt and 2.1% in local debt. On the same debt, the government debt was 167.7 billion lei,
increasing by 31.2 billion lei from the end of 2009, mainly on the back of government securities
issued on the domestic market, the drawings from foreign loans and the Eurobond issued to cover the
budget deficit and refinance the public debt.
V.
Absorption of foreign grants
The table below shows the evolution of grant absorption on June 30, 2010, and in the three
years passed from Romania’s accession to the European Union, as reflected in the Balance of
financial flows between Romania and the EU.
Compared to the funds accessed throughout 2009 the absorption rate over the first six months
of 2010 dropped to 25.6%, which can be partially explained by the fact that EU stopped advance
payments in 2010.
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It is important to notice that out of the 675.6 million Euros used, the biggest chunk was is
funds to farmers under EFGA.
The GCB amounts used for programs funded from foreign grants went significantly up in Q2
2010, reaching a monthly average of 698 million lei compared to 200 million lei in Q1 2010.
Financial flows between Romania and the European Union
NET FINANCIAL BALANCE
million
Euros
Row
EU Funds
0
A
1
I Received from EU (A+B)
2
A Pre-accession
3
B Post-accession. of which:
4
a)
Advance payments
5
b)
Reimbursements( including under EFGA)
6
7
a)
8
b)
9
10
11
12
Achieved
Achieved
Achieved
2007
2008
2009
2007-2010
1
2
3
4
5
6=2+3+4+5
1 571.55
2 590.46
2 861.87
7 699.67
432.13
91.26
812.26
747.68
618.74
2 269.93
2 479.41
584.54
759.29
1 842.78
2 243.13
5 429.74
117.35
19.09
752.28
1 380.47
960.34
3 112.18
2 362.06
565.45
7.01
462.31
1 282.79
2 317.55
B1 Structural and Cohesion Funds. of which:
533.09
32.08
421.38
648.45
917.84
2 019.75
Advance payments from structural funds and
cohesion funds
30.45
14.53
421.38
648.45
777.23
1 861.60
502.64
17.54
0.00
0.00
140.61
158.15
1 859.40
547.78
22.02
1 040.62
1 141.86
2 752.28
0.00
0.00
15.13
578.75
0.00
593.88
1 009.54
124.98
0.00
0.00
565.93
690.91
849.86
422.80
6.89
461.87
575.93
1 467.49
86.92
4.68
315.89
153.71
183.43
657.71
86.89
4.56
315.77
153.27
183.10
656.71
0.02
0.13
0.12
0.43
0.33
1.00
1 445.44
701.53
1 150.89
1 268.93
1 364.43
4 485.78
1 383.60
673.93
1 129.13
1 246.78
1 315.49
4 365.32
61.84
27.60
21.77
22.15
48.94
120.45
1 466.09
-25.73
420.66
1 321.52
1 497.44
3 213.89
Reimbursements from structural funds and
cohesion funds
B2 Agriculture. Rural development and fishery.
a) Advance payments in funds for agriculture.
rural development and fishery
b) Reimbursements from funds for agriculture.
rural development and fishery
c) European Fund for Guarantees in Agriculture
(EFGA)
B3 Other (post-accession). of which:
a)
Advance payments
15
b)
Reimbursements
16
II AMOUNTS PAID TO EU (C+D)
19
Achieved
675.80
14
18
Implementation
data at 30 06 2010
2 911.53
of which:
13
17
2010
Planned
A Contribution to EU Budget
B Other contributions
III Balance of flows = I - II
12