Books on Romania
% of GDP
Update No: 099 - (26/07/05)
IMF seals 0.7% fiscal deficit for Romania's 2005 budget
Romania is living through interesting times. Its government has issued a new
currency to prepare for eventual harmonisation with Euroland and to curb
inflation. Meanwhile, it has raised its forecast for 2005 economic growth and
revised its budget-deficit target for the year.
This came as the International Monetary Fund (IMF) demanded that the country cut
spending and improve tax collection, local media reported recently. The
government agreed to a new budget deficit goal of 0.7 % of gross domestic
product (GDP), narrower than the original target of 0.75%, the government said
in a statement issued with the IMF and the central bank.
Romanian Finance Minister, Ionut Popescu, said the government also raised the
current-account deficit goal and expects GDP to grow an annual 6% rather than
5.5% that was earlier forecast. "Talks between the government and the IMF
focused on how wage increases can be controlled, on reducing losses and on
prioritising spending,'' the statement said.
The IMF said the government should find ways to keep commercial lending in
check, as foreign currency lending rose 60% over the past year. Romania last
March asked the IMF for at least two months to produce evidence a bigger deficit
won't hurt the economy and that it can generate enough revenue through better
The government, IMF and central bank issued the statement at the end of a
two-week visit to Bucharest by IMF representatives who assessed the government's
performance in controlling the current account and budget deficits and inflation
Meanwhile, nearly 7,000 vacancies in the public sector will be put on hold,
2,500 of these in the education system. All public employment in the July
1st-December 31st period will be frozen, except certain positions and the ones
in the pensions system. Investment expenses will be reduced by approximately one
per cent, to 2.8-2.9% of GDP and agricultural subsidy will be reduced by 38.7m
Salary increases in the state companies monitored, according to the IMF
agreement, will be limited to 4% this year. The number of vacancies put on hold
for these companies will be 3,800-4000. In the mining system, 7,600 employees
will lose their jobs, compared to the previously established 5,500.
Inflation target revisited
As regards inflation, the government said the rate may reach 7.5% from an
original target of 7%, according to the finance minister. Romania's economy
expanded an annual 8.3% in 2004, while 2004 inflation stood at 9.3%. That is no
mean achievement for a country whose inflation rate in the 1990s was over 70%
per annum and was 323% in 1993.
One plank of anti-inflation strategy in Romania is that the government could
raise the value-added tax (VAT) next year to as high as 22% from 19% to keep
consumer spending in check, Popescu said in an interview on June 21st with the
British Broadcasting Corp's Romanian service. The country also will next year
extend a 16% flat tax on company profit and individual income, the lowest in
eastern Europe, to capital, real-estate and dividend gains, Popescu was quoted
as saying by the BBC. VAT in Romania is currently 19%t.
A rise in lending, triggered by increased consumer demand, is fuelling inflation
and the current account gap, Popescu said, cited by the BBC. For its part, the
IMF assessed the effects of lower taxes after Romanian Prime Minister Calin
Tariceanu's six-month-old government on January 1 introduced the 16% flat tax in
eastern Europe to replace rates as high as 40 per cent on individual income and
25% for corporations. Lower taxes and falling interest rates on loans boosted
consumer lending and pulled in imports that widened the trade and current
Romania's previous government last July signed a new lending agreement with the
Fund, allowing for the monitoring of its economy. The two-year accord also
offers Romania an option for almost US$400m in loans to adjust its economic
policies before it joins the European Union (EU).
Romania has said it doesn't plan to use any money from the IMF this year or
next. The government also said the current IMF accord will be the last before
the country joins the European Union.
Romania issues new currency
But there is another plank to anti-inflation strategy in Romania. It
recently issued its new leu to significantly reduce the par value of its
national currency and to mark the convertibility of its national currency, said
Mugur Isarescu, the central bank's governor. The denomination eliminates four
zeros from the national currency, and a new leu equals 10,000 "old"
lei. One US$will be traded at 2.989 lei and one Euro at 3.6 lei. "Romania
wants to make its currency fully convertible by the end of next year though
won't adopt the European currency earlier than 2012," Isarescu said. Annual
inflation should slow to between 2 per cent and 3 per cent by 2008, he added.
Romanian President Traian Basescu said at the issuance ceremony that the
introduction of new leu marked the end of "a transition period" for
the economic development in Romania. Romania had added the zeros to the bank
note as the leu experienced years of high inflation. Inflation, as we have seen,
fell from 320% in 1993 to 9.3% at the end of last year. The central bank's
governor said the revaluation of the national currency might contribute to
curbing the inflation to 2-3% by 2007 or 2008.
The move is part of efforts to prepare the local economy for EU entry. "The
currency's re-denomination is a bridge towards the adoption of the Euro,"
Isarescu said. "It would be odd for us to have a currency ending with so
many zeros at a time when we are preparing for full convertibility of the leu."
The re-denomination will cost the central bank about 30 million Euro, Isarescu
said, while preparing the move.
The new bills and coins will circulate together with the old ones until the end
of 2006. However, there is no time limitation for exchanging the old units at
banks. The denomination is not expected to fuel inflation, Isarescu explained.
It traded at 29,809 lei to the US$ and 36,050 lei to the Euro in early July.
The old leu was the world's cheapest currency, after the former hyper-inflation
country Turkey, wiped six zeros off the lira in January. The biggest bank note,
currently one million lei, will become 100 lei, with one USD. The nation's 38
commercial banks closed on June 30 for 48 hours to adjust their computers, and
the central bank replaced a quarter of the cash in the market with new notes and
Banks shut down the more than 3,400 automated teller machines and other cash
machines throughout Romania for a few hours either on June 30 or on July 1, to
load new computer software that will read RON instead of the old ROL.
The Bucharest Stock Exchange suspended trading to allow for the changes, while
electricity and natural gas distribution companies said they also took breaks of
two days to one week to adjust their billing systems. Not all banks operating in
Romania will load their cash machines with the new notes because they are not
confident the 25% that replaces the old cash in circulation will be enough to
ensure a permanent supply of new money.
Raiffeisen will stick to loading its more than 750 cash machines with old bank
notes. Banca Romana pentru Dezvoltare (BRD)-Groupe Societe Generale, the
country's second bank, adapted one third of its cash machines to the new
currency, said Chairman Patrick Gelin, during the official ceremony for the new
World Bank offers US$225m loan
The World Bank will grant Romania a loan of US$225m for the development of
its transport infrastructure, the international financial organisation said in a
recent statement. The lending agreement has been ratified by the government
through an emergency ordinance passed during the latest session.
US$149m will be allotted to the National Company for Roads and Motorways, US$75m
to the National Company for Railways and US$1m to Metrorex for projects aiming
to increase transport efficiency and cost cutting, and to decrease pollution.
The projects will be finalised and implemented by April 30, 2009.
Renault's investment at 2bn Euro
Renaults' investments in Dacia will increase a great deal over the next few
years, Romanian Deputy Prime Minister, George Copos, said recently, New Europe
"Renault's investments in Pitesti will reach two billion Euro by 2008, as
they currently stand at one billion Euro," George Copos was quoted as
saying by daily Ziarul Financiar. Renault's total investments in Dacia announced
had reached 700 million Euro at the end of last year. Investments this year and
in 2006 should total approximately 150 million Euro. The Dacia officials did not
care to provide any comment on the expansion of the investment plans, the paper
Renault unit teams up with Mahindra
After forming a 51:49 joint venture with the Renault Group, Mahindra &
Mahindra, may use the French company's Dacia plant in Romania to manufacture its
Scorpio utility vehicle, Business Express reported.
This will then be marketed in the developing European markets through Renault
distributors. A senior source added that Renault might consider Scorpio for its
thrust in the Franco-African market. Renault does not have any SUV in its
automotive line-up. Scorpio was developed to have both right and left-hand drive
variants and the latter has already gone through the testing phase.
6 European banks bidding for BCR
Deutsche Bank AG, Fortis NV, Banca Intesa, BNP Paribas, HVB-Creditanstalt and
Unicredito Italiano SpA are competing to buy Romania's soon-to-be privatised
Banca Comerciala Romana (BCR), said Romanian privatisation agency President,
Gabriel Zbarcea, recently, New Europe reported.
Zbarcea added that he believes other banks will also express an interest in
buying BCR. Apparently, the Belgian bank KBC has asked to see Zbarcea, and he
believes that it is also interested in buying BCR, he told Mediafax news
service. The Romanian government plans to privatise BCR - which has 4m customers
and a 30% market share - by the end of this year, or in the first quarter of
2006. BCR is understood to be worth around 1bn Euro, news agencies said.
Raiffeisen and Dexia Bank home in on Romania's CEC
Raiffiesen Bank is interested in purchasing Romanian Savings Bank (CEC) in order
to expand its operation in Romania, the daily Averea reported, citing Raiffeisen
Bank Romania's Chairman, Steven van Groningen.
"The brand, the network and the clientele are very important for us. As
Renault has a Dacia Logan and a Renault Megan, we can have a CEC brand, with its
own products designed for people in need of cheap services, and Raiffeisen
products, more sophisticated. I think it is very important for Romania to have a
bank willing to serve the population. You can keep such a bank only if you offer
cheap, high standard products. We can make it cheaper, as we have already
invested millions of Euro in our Romanian branch. We would keep the name of the
bank and a large part of the network, if we win the bid for CEC's privatisation,"
The Belgian financial group Dexia also said the network of the Romanian Savings
Bank (CEC) is its biggest advantage and it would not restructure the network if
selected for the bank's privatisation, Mediafax news service reported.
According to Johan Wuitack, a representative of the Dexia's Development
Department, the group expects the Romanian authorities to take into account the
price offer as well as the investor's experience and capacity. Mark Lauwers,
president and executive director of the Slovakia branch of Dexia Bank, said CEC
could help a better distribution of European funds for various programmes.
Lauwers added that an important condition for the successful attraction of these
resources was the regulation framework that Romanian authorities would lay down.
He hoped that the vast CEC network will be able to reach the recipients of the
funds and also provide consultancy services for the elaboration of business
plans in compliance with European standards.
Fitch: Rompetrol's ongoing probe remains key concern
Fitch Ratings, the international rating agency, said recently that the ongoing
investigation of Romania's general prosecutor regarding employees of The
Rompetrol Group NV (TRG, rated B- (B minus)/stable outlook) remains a key credit
concern for the company, New Europe reported.
One of the main charges relates to the privatisation of TRG's main asset, the
Romanian Petromidia refinery, according to Fitch. The criminal investigation
relates to TRG group's key managers, including the CEO and majority shareholder
of TRG, Dinu Patriciu, who was temporarily detained for 24 hours by the general
prosecutor in late May 2005, the rating agency said.
A Romanian court and subsequently an appellate court rejected the prosecutors'
request to arrest the CEO.
Fitch noted that although these events have tarnished the company's reputation,
its business and financial profile remains consistent with the B- (B minus)
rating. Fitch deems TRG's liquidity position and continued ownership of
Petromidia as key to maintaining the current level of rating. The agency
understands that the investigation is not expected to lead to lending banks
demanding early repayment of loans extended to the TRG group, given security in
place on its assets and the group's improved financial results on the bank of
high refining margins.
Nevertheless, the agency will continue to monitor TRG's liquidity position. A
significant deterioration of the company's liquidity, for example driven by cash
out-flows (penalty payment) on a negative outcome of the investigation or early
repayment of loans demanded by banks, may put pressure on the rating.
The refinery is the key asset of TRG group (it generated 86% of the group's 2004
EBITDA). Debt continues to be largely represented by short-term bank loans,
pointing to relatively high refinancing risk. However, bank facilities due in
June 2005 are modest at US$10m (or 7% of TRG's total bank debt), while
maturities in July and August are US$4m (3%).
Against this, available liquidity in the form of committed unused credit lines
is US$42m with cash of US$17m as of end-May. Additionally, the company is
expected to generate net free cash flow in the coming months - monthly net free
cash flow generation is expected to average US$12m for May-June 2005 (similar to
first quarter of 2005).
More significant maturities become due in September (coupon payment of 22m Euro
under the hybrid instrument). The investigation has been recently extended to 3
more current and former key employees of TRG group, including the deputy CEO and
minority shareholder of TRG (a US citizen).
Fitch is concerned that the ongoing investigation and recent developments may
distract the management team from strategy implementation and day-to-day
operation of the company. In an attempt to address these concerns management has
decided to put all expansion projects on hold and focus on
"stay-in-business" investments. Fitch believes this approach is
understandable in the current situation and will preserve short-term liquidity,
although if sustained it may affect the group's future business profile. The
company has also set up a 12-member operations committee to ensure business
continuity in all circumstances.
Standard & Poor's Ratings Services recently said it assigned its BB+ senior
unsecured debt rating to the City of Bucharest's planned fixed-rate 10-year bond
time, the BB+ long-term issuer credit rating on the Romanian capital was
affirmed, said S&P. The outlook is stable, the rating agency added. The
funds from the bond will be used to finance infrastructure projects needed to
meet EU requirements, New Europe reported recently.
E.ON gains majority of Distrigaz
German energy group E.ON said recently it has acquired a majority stake in
Distrigaz Nord, a Romanian gas company with one million customers, as part of an
eastern European expansion. As part of the transaction, E.ON Ruhrgas is to pay
the Romanian state 125m Euro for 30 per cent of the existing stock in the unit.
A parallel recapitalisation with E.ON spending 178m Euro to acquire new shares
will raise the Germans' stake to 51 per cent. Distrigaz has a market share of 29
per cent in Romania and supplies 4.6bn cubic metres of gas annually. E.ON, based
in Dusseldorf, is one of Germany's main electricity and gas utilities.
FOOD & DRINK
Smithfield investing US$800m in Romania
Smithfield Foods will invest more than US$800m to buy companies and expand
plants in Romania in the next five years to make that country a centrepiece of
the pork giant's European strategy, New Europe reported.
For the past five years, Smithfield has been building its European business
around its Animex subsidiary in Poland. But Smithfield CEO Joseph W. Luter III
has been vocal about the potential for Romania to become the pork capital of
Smithfield's planned investment is a signal that the company's European focus is
already shifting to Romania. The firm is looking to buy Romanian pork
competitors and pour money into the expansion of its slaughterhouses.
Smithfield, the largest producer and processor of hogs in the world, has been
moving aggressively over the last five years into Europe's meat markets. Besides
Poland, Smithfield purchased competitors in the United Kingdom, France, Spain
Luter said at the company's annual meeting last February that communism moved
meatpackers from Eastern Europe to Western Europe. But the natural fit for the
industry is in the former communist countries, where state meat companies are
being sold at bargain prices. In eastern Europe, labour, land and grain costs
Smithfield's Romanian hog-raising subsidiary is entering into US$55m worth of
contracts with 250 farmers in that country to feed and raise the hogs.
Smithfield first entered Romania last year by buying the country's largest pork
processor, Comtim Group SRL, for US$83m. Comtim is small, but vertically
integrated like Smithfield. Comtim raises about 200,000 hogs annually and has
two of its own slaughter facilities. The local hog giant also has acquired half
of a Romanian distribution company, a cold storage warehouse and a port on the
Danube River for shipping. Smithfield plans to export Comtim pork to the
European Union, which Romania hopes to join in 2007.
Romania to recover over 38% of Iraqi debt under Paris Club terms
Romania's government joined an agreement of the Paris Club of creditor countries
to accept repayment of 80% of Iraq's US$1.7bn of debt, Romanian Deputy Finance
Minister Dragos Neacsu said recently, New Europe reported.
Romania will be able to retrieve about 38.5% of its receivables from Iraq,
provided that the state receives an 80% reduction in the Paris Club debt, the
minimal amount that will be retrieved being US$663m, capitalised interests
Romania started talks with the new Iraqi government over repayment of the debt
under Paris Club terms earlier this month. The Paris Club decided to forgive
repayment of US$31bn, or about 80% of what Iraq's owed the 19 nations that are
members of the creditors club, Neacsu said.
"We understood that we wouldn't be able to obtain better conditions than
those of the Paris Club countries. We estimate we can recover some 40% of
Iraqi's debt," Neacsu said. "Iraq officials already explained in
December that they can't give us a better deal."
Nexans lands huge telecom deal
Nexans, the worldwide leader in the cable industry, signed a 15m Euro contract
with Atlas Telecom Network Romania, a private Romanian telecom operator, for the
supply of 2,300km of fibre optic (OF) cables and approximately 6,000km of copper
telecom cables, New Europe reported recently.
Atlas Telecom Network Romania is developing a project for 20 important cities in
Romania, including the capital Bucharest, to provide data and voice services,
based on DECT(a) technology. For this project, Nexans will deliver ADSS (All
Dielectric Self Supporting) OF cables and copper telecom cables for xDSL
Rolls-Royce eyes Romanian deals
British company Rolls-Royce said recently it plans to collaborate with Romanian
companies for the construction of maritime supplying ships, military patrol
ships and the development of new engines for the aeronautic industry.
Rolls-Royce European naval division sales chief Peter Dunn said he has already
visited a series of naval yards such as Daewoo Mangalia and Damen Galati and
established preliminary contact with the naval yard in Constanta, New Europe