Since the beginning of 2018, Romania has spent RON 2.5 million more per day due to the increase of interest rates for state loans, according to an analysis conducted by Business Review. The causes of this increase include the rapid hike of inflation, the growth of the ROBOR index and the state’s growing financing needs due to an increase in spending, analysts say.
The state has to borrow around RON 44 million more to cover the gross amounts it needs for financing (loans reaching maturity plus the budgetary deficit), according to data posted on the Finance Ministry’s website.
Until July, the Finance Ministry (MFP) borrowed around RON 30 billion, of which EUR 2 billion and USD 1.2 billion from external markets. Loan costs increased by at least 1.5 percentage points compared to last year, economists say, meaning that for the amounts borrowed costs grew by RON 450 million until June.
According to the budget execution for the first four months of the year, interest rate spending increased by 56 percent compared to first four months of 2017.
Economic developments determined the hike in costs, according to experts. “The increase was the result of the rise in inflation and in the interest rates on the monetary market. On top of these comes the state’s high financing needs. With RON 74 billion in gross financing need, the Finance Ministry needs to be continuously present in the market. Of course, there’s also a buffer that ensures 4 months of financing (about RON 24 billion) which gives the state some comfort. The interest rates for loans taken out by the state have grown by at least 1.5 percent compared to last year,” Ionut Dumitru, the president of the Fiscal Council, told BR.
This can be confirmed with some quick research: In mid June 2017, MFP borrowed RON 700 million from the internal market with a five-year maturity, with a yield of 2.81 percent. In the same period of June 2018, MFP borrowed RON 500 million, with a five-year maturity and a yield of 4.18 percent. Furthermore, since the beginning of the year, the rate of rejection of offers from banks was around 14 percent, as MFP cancelled about 10 of the 70 bond issuances, according to data from the Ministry.
Anca Dragu, former Finance minister, told BR that Romania’s credit default swap (CDS) is the highest in the region, while in 2017 the country was seen as safer for investments than Hungary.
“Public debt includes a morality element – the current generation decides to force future generation to foot today’s bills. What if you went to a restaurant and when the bill came you said you couldn’t pay and that it should be paid by those who go to that restaurant the following day? We can see an increase in financing costs in the last year for the entire area, but Romania’s increase was much higher. There are several measures that justify the costs growth for the area, such as BCE’s signals of strengthening its monetary policy and the mix of fiscal and monetary policy in the US. However, Romania is paying a higher premium compared to these other countries, which is linked to the lack of credibility and sustainability of its internal economic policies. Between December 2014 and July 2017, Romania was seen as a less risky country than Hungary and Bulgaria. Starting with July 2017 and more significantly since January 2018, Romania has been seen as more risky than the other countries in the region (except Croatia), which led to a higher financing costs and more expensive loans for both the state and the private sector,” says Anca Dragu.
Another element that supports the idea of a disconnect from other countries in the region, Dragu says, is the yield of sovereign benchmark bonds. “Thus, for Romania the yields are growing in 2018 at much higher rates than in the case of the Czech Republic, Poland or Hungary, which shows that specific factors in Romania, namely politics and internal policy, make investors claim higher interest rates,” says the former Finance minister. Romania’s sovereign bond yields have grown for all maturities compared to 2017 by around 100 base points, reaching 4.8 percent at 10 years, while in Poland they grew by a maximum of 10 base points and reached 3.5 percent at 10 years, and in Hungary by over 100 base points, but reaching around 3 percent.
Finance minister blames political statements
Finance Minister Eugen Teodorovici has recently admitted that the state has faced “very large costs” in some cases for attracting money from the market but says that this is “strictly due” to “baseless political statements”.
“We will show the public in the upcoming days how the MFP’s issuances on the market have sometimes resulted in some amounts of money not being bought on the market because the costs were very high, and even when we had to borrow money for the current financing the costs were somewhat higher and the reasons are strictly related to baseless political statements,” Teodorovici said.
“When you say that inflation will be 12 percent, when the National Bank governor himself clearly states that inflation will decrease after it reaches 5.2 percent, how can you make such a statement? Or when people say ‘dear Romanians, stop sending money into the country, because someone will certainly steal it’ or ask if there’s ‘any more money left for pensions and salaries’ – when you let it be understood that the state doesn’t have enough money to ensure the things that matter most like pensions and salaries, potential investors in state bonds already have a signal, and they come to us with a higher cost when they buy state bonds, they make higher offers,” Teodorovici said.
However, the state does have some financial comfort thanks to the buffer held at the National Bank, of around RON 24.5 billion (four months’ worth of financing), which it can use in case the growth trend for interest rates became a bigger threat to the budget deficit.
Another source of comfort is Romania’s low public debt in comparison to other European countries. This indicator grew in January-February compared to the end of last year by EUR 1.29 billion, to a total of EUR 34.82 billion, according to data published last week by the Romanian National Bank. At the end of 2017, Romania’s public debt was EUR 33.53 billion, the data shows.