by Lidia Moise
BUCHAREST, June 15 (Xinhua) -- It seemed that the International Monetary Fund (IMF)'s postponing of the third review of a stand-by arrangement with Romania until November has not distracted markets, as investors flocked to buy Romania's treasury bonds and the country's local currency stayed flat and insensible.
The freezing of the review, according to some observers, was the result of a disagreement on the government's plan to cut the labor tax by 5 percent without IMF's consent.
Romanian Prime Minister Victor Ponta detailed the government intention to cut the social security contribution of employers from 20.8 percent to 15.8 percent starting October, following approval by the Parliament.
In a June 12 statement regarding the delayed review of Romania's support package, the IMF said its discussions with the Romanian authorities on the third review of Romanian's precautionary stand-by agreement have been constructive, but "some issues remain outstanding."
The IMF has postponed the completion of its review of Romania's support package until November this year, when the government should complete a draft of next year's budget, according to Ponta.
Vlad Muscalu, a senior economist at ING Bank Romania, said investors expect no "real impact" of the review delay on Romanian leu markets.
Indeed, Romania sold to a crowded market an issuance of 500 million lei (154 million U.S. dollars) seven-year Treasury bonds at 4.13 percent average yield.
The Ministry of Finance also re-opened an earlier issuance and sold 300 million lei (92.4 million dollars) in two-year Treasury bonds. The average accepted yield was 2.9 percent for the 2 years note, as it was more than five times oversubscribed.
"This is what the market says. Investors accepted a 4.49 yield in the very day the IMF postponed the review, which is down from the previous level of 4.7 percent," said Dragos Neacsu, chairman of Erste Asset Management Romania.
"The markets reacted calmly as they knew that the economy is stabilized," Stefan Nanu, the chief of Romania's Treasury and Public Debt department, told Xinhua, referring to the latest forecast of 2.8 percent gross domestic product (GDP) growth for Romania this year.
Nanu added, "The tax cut will not hurt Romania's chances of hitting this year's deficit target of 2.2 percent of GDP."
Meanwhile, the local currency, Romanian leu, was almost flat ending the week at 4.3970 lei for one euro, in line with regional trends.
"Markets are reassured by the budget's prudent profile, they don't worry. The credit default swap (CDS) didn't rise. The most important move was the rating upgrade performed by Standard&Poor's last month, which stamped Romania as an investment grade country," said Mihai Ionescu, the director of Deutsche Bank's agency in Romania.
CDS, used to insure investors against the risk of a Romanian sovereign debt default, are down at 135 basic points from the 185 level touched at the beginning of this year.
Romania's spread over Germany shown by CDS indicated a moderate perception of risk as compared with neighbor Hungary or Portugal which stands at higher levels of 167 basic points and 141 basic points, respectively.
IMF has granted financial aid to Romania through ten stand-by arrangements since 1991. The current two-year precautionary stand-by agreement worth 4 billion euros (5.4 billion U.S. dollars) is the third accord requested by Romania since the outbreak of the economic crisis in 2009 which hit hard the Romanian economy.
Romania left the excessive deficit procedure long before its regional peers and plans to stay on track.
"What happened is that the program is on track is just an exercise of extended consultation. Not that they rejected the idea to slash the taxes on labor, they just disagreed with the timing. The IMF is not the stiff institution which praised the arithmetic schemes, they want all sectors to act accordingly, to stick to privatization program," Misu Negritoiu, the president of the Financial Supervisory Authority (FSA), told Xinhua.
The impact of the tax cut on this year's budget is estimated at 0.85 billion lei (262 million U.S. dollars), or 0.5 percent of the GDP, according to Muscalu's calculation.
However, despite the budget impact, easing taxes on labor is an investment friendly measure for long-term growth given Romania's levels of work taxation, higher than the average in eurozone or in the wider European Union (EU).
IMF agreed with the long term benefits of lowering the labor tax, said Mihai Tanasescu, vice president of European Investment Bank (EIB), former finance minister of Romania.
"It was not an easy decision, but a complex one which can be properly implemented rather quickly. The Fund is reluctant because it thinks that for short term a cut of a tax which isn't covered with new sources of revenues or with a reduction of expense poses a threat to budget deficit and may not be sustainable," said Tanasescu.
It seems that for the IMF the idea was a good one, but the timing for implementing is was not exactly opportune, given the persistent deficit of the social contribution fund, covered with transfers from the state budget, according to analysts.
Statistics show some demographic worries as Romania has more pensioners than active workers.
According to the Labor Ministry's data, Romania has 5.37 million of pensioners and only 5.07 million employees contributing to the social fund. In the tax cut equation this disparity may seem dangerous for the budget.
For the next year, the 5 percent tax cut would imply a loss of revenues equal with 0.75 of GDP, raising the risk of failure to reach the 2.2 deficit target.
Romania's authorities hope the economy will grow with a robust pace, higher than the 2.2 percent GDP growth taken into account in the deficit equation.
"This agreement with IMF, European Commission and World Bank, the last one for Romania, will be properly executed and finished," said Tanasescu.
Describing the IMF agreement as an anchor of macroeconomic stability and predictability, Tanasescu said, "What we see in the financial market is consistent with the idea that Romania stabilized the economy, displayed a constant growth and has the potential to rich an annual 4-5 percent GDP growth in the next years."