Romania’s Economic Program Supported by the IMF, EU, World Bank, and other IFIs

1. Romania’s Economic Program Supported by the IMF, EU, World Bank, and other IFIs by Tonny Lybek IMF’s Resident Representative in Bulgaria and Romania tlybek@imf.org at Norwegian Cooperation Program Bucharest December 4, 2009

2. 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: Romania’s Economic Program • IV: Conclusion

3. I.1 The Global Crisis • Deepest global recession since the 1930’s: • 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/g20/110709.htm)

4. I.2 World Economic Outlook

5. II.1 Central and Eastern Europe • The Good Times 2003–07—Catching-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 -> Resentment -> Bargaining -> Depression -> Acceptance!

6. II.2 Impact of The Global Crisis • Shock I: Lower external demand • Shock II: Slowdown in capital inflows: • Foreign direct investment (FDI) • Funding of—mainly foreign-owned—banks! • 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!

7. II.3 Vulnerabilities and Severity of Recessions Have Varied

8. II.4 Regional Economic Outlook

9. 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 => Emerging credibility problem! => In need of a “safety belt”!!

10. III.2 Romania’s Package • Joint package supporting Romania’s 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 3–5 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**: 2009–10, 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

11. III.3 Romania’s 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)

12. 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

13. 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 -3⅔% -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

14. 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

15. 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-November√

16. 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

17. 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

18. 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

19. III.10 Selected Indicators • Real GDP, prel. -7.4% (Q1–Q3 2008 to Q1–Q3 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% (Q1–Q3 2008 to Q1–Q3 2009) • Imports (value in €): -36.0% (Q1–Q3 2008 to Q1–Q3 2009) • Industrial output: -8.5% (Q1–Q3 2008 to Q1–Q3 2009) • Housing prices, anecdotal information

20. III.11 Market Reactions

21. 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. • Romania’s 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

22. Thank you very much for your attention