Financial February: Ciolacu throws the Roşia Montană "firecracker" into the public space

Traditionally, the second month of the year should be marked by the beginning of the first parliamentary session and less by the visibility of the work carried out by the government, but the electoral year 2024 seems out of the ordinary, in view of the four elections that will take place, but also of the permanent need to finance budget expenditures that dig deep into the base of the budget deficit. This has been seen since the end of February when the budget execution for January presented by the Ministry of Finance showed a budget deficit almost double compared to January 2023, i.e. 7.89 billion lei (January 2024) compared to the deficit of 4.02 billion lei (January 2023).

The need for money in the state budget forced the Ministry of Public Finance to launch in mid-February on the international financial markets two tranches of bonds with maturities of 7 years and 12 years, through which it attracted 4 billion euros, although the subscription amounted to 14, 8 billion euros. Moreover, also in the same period, the Ministry of Finance launched a new issue of government securities, with maturities of 1 and 3 years, with annual interest rates of 6% and 6.75%, respectively, issue to be concluded during of March.

It is likely that part of the sums that will enter the state budget will be allocated to support the expenses committed through various decisions and emergency ordinances to support the farmers and transporters who protested in the streets during January, protests that ended with an agreement signed on February 2 with Prime Minister Marcel Ciolacu, but also to satisfy the salary demands of the Health and Finance employees who also threaten to start new protests at the national level.

In all this fragile financial context, the National Bank of Romania tries to maintain a balance so that in February it also maintained the level of the monetary policy interest rate at 7%, the interest rate for the lending facility (Lombard) at 8% and at 6% the interest rate related to the deposit facility, even if inflation stood at the end of the previous month at 7.4%, increasing compared to the end of 2023.

However, the need for budget revenues is constantly increasing, if we also take into account the decisions of the CSAT meeting on February 21, which gave the green light to the legislative project on voluntary military service, a service which, however, requires the three-month payment of those who want to to prepare in this sense, but also a substantial bonus in the fourth month.

Apart from this expense, the specter of paying for unpurchased vaccines from the contract with Pfizer, a company that sued the Romanian state, which ordered these vaccines during the time of Prime Minister Florin Cîţu, but which it later refused to purchase, also appears on the horizon. But this process is long-lasting and the Ciolacu government last month ordered the hiring of legal specialists to successfully represent the Romanian state in this case, just as they did in the case of Roşia Montană, a file that represented the scaremongering shown constantly throughout February by Prime Minister Marcel Ciolacu and Finance Minister Marcel Boloş claiming that we will pay compensation of 6.7 billion dollars.

In addition to the above expenses, there will be added those for the European Parliament and local elections that the PSD-PNL coalition decided to combine on June 9, for the presidential elections that would take place during September, but also for the parliamentary elections which will take place at the beginning of December, and the government has already asked the ministries to allocate, at least for the first election, part of the sums received from the state budget, which they would later recover during the budget rectification.

• The Roşia Montană scarecrow and the Pfizer file, an occasion for mourning for the Government regarding budget expenditures

Last month had a stormy start, with Prime Minister Marcel Ciolacu announcing in the government meeting on February 1 that Romania risks losing the Roşia Montană file that was pending before the international arbitration court, that the Government will have to pay huge compensations, of billions of dollars ( 6.7 billion dollars, according to the statements of the Minister of Finance, Marcel Boloş) and that under these conditions he will publish, according to the arbitral tribunal's sentence, all the documents in this case so that all citizens know who was to blame in that case.

The controversial statements of Prime Minister Marcel Ciolacu regarding the Roşia Montană case continued throughout February, although September 2023 - Sunday the debate procedure of the international arbitration court ended - and until February 1, 2024 the head of the Government did not make any public appearance. in this case.

At the end of February, the prime minister seems to become categorical in his statements regarding Roşia Montană, giving the impression that it is very certain that we will have to pay compensation as a result of this process, early on, on February 24, he declared: "Roşia Montană (was used) . ) to invent a political entity (...) and now the bill is coming: according to some, two billion dollars, according to others, five billion dollars. This is the bill that all Romanians will pay. At some point given, someone wanted to use Roşia Montană, "Uniţi Salvăm Roşia Montană", to create (the Union) Save Romania. This is the truth".

If on February 1, Prime Minister Ciolacu was talking about the court decision that will come by February 10, about the payments that should be discussed "with those who take care of you, it is possible to win this process" and about making available the document or the decisions made "like Romania". to lose this trial", statements later completed by the Minister of Finance Marcel Boloş, who stated that it is possible that the Government will be obliged to pay damages of 6.7 billion dollars, on March 7 - only one day before the ICSID will decide publicly favorable to Romania - Marcel Ciolacu posed as a defeatist and signed that he is willing to organize a referendum for Roşia Montană. "Let's see if the Romanians agree to start gold mining", signed Marcel Ciolacu on March 7, the respective solution being brought into discussion after Minister Boloş signed, on the same day, that it is possible that, instead of paying the compensations of 6.7 billion dollars, the Romanian state to offer Gabriel Resources the opportunity to continue the mining project in Roşia Montană.

However, the next day, on March 8, ICSID rejected the action of the Canadian company Gabriel Resources and, immediately, Marcel Ciolacu and Marcel Boloş posed as winners and claimed that they had achieved an important victory for Romania.

For the attitude of Prime Minister Marcel Ciolacu, as a result of which the shares of Gabriel Resources and RMGC experienced a double increase on the Toronto stock exchange, former Prime Minister Dacian Cioloş filed a criminal complaint with the General Prosecutor's Office, and the former Minister of Transport, Cătălin Drula, filed a criminal complaint to DNA.

The prime minister announced, also, that our country chose another international file opened by the Pfizer company for the non-procurement of a huge amount of anti-Covid 19 vaccines ordered by the Cîţu government.

That is why, in order to better prepare defenses in international cases, the Ciolacu government adopted on February 1 a memorandum through the authorizes the Ministry of Finance to contract legal assistance and representation services in order to ensure the representation of Romania in the case registered with no. F5331-23, pending before the Francophone Court of First Instance in Brussels, in which the company Pfizer - BioNTech sued Romania for the payment of all anti-Covid vaccines, purchased as part of the European Union supply contract, signed in 2021. According to the data in the file, the Pfizer company is asking the Bucharest government to pay 564 million euros for the 28.94 million vaccines ordered.

Regarding the Roşia Montană case, on February 8 the Government approved an emergency ordinance by which it regulated the manner of representation of the Romanian state by the Ministry of Finance in future international litigation, judicial and arbitral, in files regarding foreign investments and their protection. The normative act provides that the selection of specialized lawyers shall be carried out on the basis of its own selection procedure approved by the head of the Ministry of Finance, based on the provisions of Law no. 98/2016 on public procurement and establishes the obligation of persons who have fulfilled or are fulfilling certain duties within the public institutions and authorities that have managed the issue that is the subject of the respective international disputes, including dignitaries, to participate in the meetings requested by the lawyers who provide legal representation in those litigation. According to the new emergency ordinance, the respective persons cannot refuse to sign witness statements, participate in scheduled oral hearings and sign any procedural documents specific to each international dispute, if it is appreciated by the lawyers who provide legal representation that the information or documents held by them are useful for supporting Romania's defenses or ministries.

• There is no money, but the Government approves support schemes for farmers and transporters

However, the financial problems did not prevent the Government from adopting an emergency ordinance on December 8 that approved the state aid scheme Creditul Fermierului. The normative act aims to increase access to financing for farmers, through the granting by the Ministry of Agriculture and Rural Development of a state aid, in the form of a grant, which covers the interest component, representing the 3-month ROBOR part, granted for a maximum period 60 months, without exceeding the nominal amount established by the financing agreement, but not more than the equivalent in lei of the sum of 280,000 euros/beneficiary. The interest rate related to the loans consists of 3-month ROBOR plus a maximum margin of 1.95% per year.

The budget of the state aid scheme has a maximum value of 815.5 million lei, the equivalent of 164.1 million euros, and is implemented within the limits of the amounts available in the "Fund for lending and credit guarantee" account, as well as the approved annual budget provisions with this destination in the budget of the Ministry of Agriculture and Rural Development.

The establishment of this scheme is one of the measures negotiated with the farmers who protested nationally during the month of January, a protest that ended with the agreement signed on February 2 by Prime Minister Marcel Ciolacu and the protesters' representatives.

Also to meet the demands of the protesters, in the government meeting of February 22, the decision was approved by which a state aid scheme was established to compensate for the increase in the excise duty on diesel fuel used as engine fuel. Through this normative act, the Government will refund to road transport operators, licensed in Romania, the amount of 13 banis per liter of diesel purchased, to stop the increase in prices related to road transport operations of goods or people, which causes an increase in costs for other products and services. Operators who carry out road transport activities for their own account or for a fee, with vehicles with a maximum authorized gross weight of at least 7.5 tons, and those who carry out passenger transport activities, regularly or occasionally, will benefit from this support , with the exception of local public transport of people. The aid is granted until December 31, 2024, and the maximum estimated total budget is 180 million lei. In the same meeting, the Government established a de minimis aid scheme to support SMEs, a scheme whose purpose is to finance the interest differences generated by the ROBOR increase and which cannot be covered by the state aid approved through the financing agreements according to two normative acts. The total budget of the scheme is 86.56 million lei, and the payment of the de minimis aid is made until December 31, 2025.

In the meeting of February 28, the Government also approved a measure requested by the protesters, namely the institution of a state aid scheme for the partial compensation of losses suffered in 2023 in the beekeeping sector, in the context of the crisis caused by Russia's aggression against Ukraine. The total value of the aid scheme is 59.86 million lei, i.e. 12.03 million euros, and the total amount that can be granted for each enterprise operating in the field of primary production of agricultural products does not exceed the equivalent in lei of 280,000 euros .

• Vulnerable consumers receive support from the Government

With regard to the energy field, in the meeting of February 28, the Government approved an emergency ordinance by which it further ensures to people in vulnerable categories the right to help for heating the home and to the supplement for energy, for the remaining period of the cold season . It is about 800,000 households, at the national level, and the members of the Ciolacu Cabinet decided that when establishing the rights to these forms of support, the increases in pension rights and salary rights entered into force from January 1, 2024 will not be taken into account, because these increases - by 13.8% of the pension point, respectively by 5% of the basic salaries for staff paid from public funds, compared to the level granted for December 2023 - would have put part of the people in the category of vulnerable energy consumers in the situation of terminating their right to home heating aid and the energy supplement or to receive them in smaller amounts than those previously received, with the risk of not being able to pay their bills.

Also in energy, the Government approved the 2024 revenue and expenditure budget of the Environmental Fund and the Administration of the Environmental Fund, by which it allocated, among other things, 2 billion lei for the Casa Verde Photovoltaic program, 600 million lei for increasing energy efficiency in public buildings, 1 billion lei for the Rabla Plus program, 300 million lei for Rabla Classic, 500 million lei for the modernization of public lighting systems and 500 million lei for the Rabla program for stoves.

The Government also decided to grant restructuring state aid in the form of a grant to the "Complexului Energetic Oltenia" SA company to finance the purchase of greenhouse gas emission certificates in 2024, in the amount of 386.63 million lei.

This state aid ensures the continuation of the activity of the lignite-based electricity production company, covering a market share of around 11.8%, being a stability factor of the national electricity system, but also an important regional employer, with the maintenance of a significant number of jobs, mainly in Gorj and Dolj counties.

• ANAF's achievements in 2023 do not cover the disastrous budget execution in January 2024

On the first day of last month, the Ministry of Finance published the ANAF balance sheet for 2023 and boasted that undeclared tax obligations of 10.62 billion lei were identified, over 70% of which were generated in the field of manufacturing industries, trade (wholesale and retail), motor vehicle and motorcycle repair and construction. The Ministry of Finance also indicated that the fiscal loss recorded by taxpayers was reduced by 4.81 billion lei and violations were identified for the sanctioning of which fines and confiscations were ordered in the amount of over 206 million lei.

However, the budget execution for January 2024 published at the end of February shows a deficit of 7.89 billion lei, respectively 0.45% of GDP compared to the deficit of 4.02 billion lei, respectively 0.25% of GDP related to January 2023.

Total revenues amounted to 47.39 billion lei in January 2024, increasing by 19.7% (y/y), while general consolidated budget expenditures amounting to 55.28 billion lei increased in nominal terms by 26.7 % compared to the same period of the previous year. Expressed as a percentage of the Gross Domestic Product, spending in 2024 increased by 0.44 percentage points compared to the same period in 2023, from 2.74% of GDP to 3.18% of GDP.

Of these, personnel expenses amounted to 11.82 billion lei, up by 20.8% compared to the same period of the previous year, and expenses for goods and services were 7.10 billion lei, up by 20.2% compared to the same period of the previous year.

Under these conditions, on February 15, 2024, the Ministry of Finance carried out the second transaction on the international financial markets, by launching two tranches of bonds with maturities of 7 years and 12 years, the total value of the bond issue of 4 billion euros having a final subscription of over 14.8 billion euros through the participation of over 250 investors. We note that bonds with a maturity of 12 years are green bonds, the funds obtained from this show being settled on February 22, 2024.

From the point of view of the types of investors, for both tranches the preponderance of "real money" type investors can be distinguished, i.e. privately managed asset funds that had a weight of 67% and 66% respectively within the 7- and 12-year maturities . At the same time, pension funds and insurance companies had a distribution of 10% and 5%, sovereign funds and official institutions a 6% allocation for both tranches, commercial and private banks had a distribution of 6% and 13% and speculative funds and brokers benefited from an allocation of 11% and 10% respectively. The 12-year green tranche was allocated in percentage of approximately 45% to socially responsible investors/with green-ESG mandates or who are known to use socially responsible investment principles/ green investment principles.

Earlier, on February 12, the Ministry of Finance launched a new issue of Tezaur government bonds, with maturities of 1 and 3 years with annual interest rates of 6% and 6.75%, respectively. The government bonds have a nominal value of 1 leu and are in dematerialized form, with the subscription ending on March 8.

• BNR keeps the monetary policy interest rate at 7%

In this financial and economic context, on February 13 the members of the Board of Directors of the National Bank of Romania decided to keep the monetary policy interest rate at 7%, the interest rate for the credit facility (Lombard) at 8% and the interest rate at 6% related to the storage facility. In reasoning their decision, Council members noted that in the fourth quarter of 2023 the annual inflation rate accelerated its decline more than anticipated, that the annual adjusted CORE2 inflation rate accentuated its downward trend in the fourth quarter of 2023 more than expected , falling to 8.4 percent in December from 11.3 percent in September, and agreed that the recent behavior of core inflation was largely driven by broader disinflationary core effects, downward corrections in agri-food commodity prices and the of temporary capping of the commercial addition to basic food products, but also reflecting the influences of the tempering of consumer demand and the decrease in the dynamics of import prices.

It was also noticed that industrial production prices for the domestic market continued to record consistent decreases in dynamics in the consumer goods segment in the fourth quarter of 2023, but the longer-term inflationary expectations of banking analysts readjusted slightly upwards in the November 2023-January 2024 range, thus consolidating above the target range.

Regarding the near-term outlook, Council members agreed that a slight slowdown in economic growth is likely in the fourth quarter of 2023 and the first quarter of 2024 compared to the third quarter of 2023, implying a moderate narrowing of excess aggregate demand in this interval, but also higher levels of the annual GDP dynamics.

Regarding the future economic developments, the members of the Council showed that the new assessments reconfirm the perspective of the increase in the annual rate of inflation at the beginning of the current year and the resumption of its decline afterwards, but at a slower pace compared to 2023 and the previous projection. Thus, after probably rising in January to a level noticeably lower than previously forecast, the annual inflation rate is expected to decrease in December 2024 to 4.7 percent. The temporary increase from January 2024 has as its main determinant the impact exerted by the increase and introduction of indirect taxes and fees in order to continue the budgetary consolidation, primarily felt on the fuel and tobacco products segments and to a lesser extent on the level of basic inflation. The overall action of factors on the supply side will, however, become disinflationary again later, but almost exclusively in the short term and with a progressively decreasing intensity, against the background of the mitigating influences expected to arise from base effects and downward corrections of commodity prices, especially of agro-food raw materials, the members of the Council highlighted on several occasions.

Under these conditions, the annual rate of adjusted CORE2 inflation is likely to continue to decline gradually, but somewhat more sharply than the dynamics of headline inflation, falling to 5.0 percent in December 2024 and to 3.6 percent at the end of the projection horizon, compared to the previously anticipated corresponding levels of 5.2 percent and 3.4 percent, respectively.

In light of the above and the quarterly report on inflation which shows that it reached 7.4% in January 2024, there is no question of our country entering a recession, declared Mugur Isărescu, the governor of the National Bank of Romania, in the middle of last month.

Isărescu said: "Investments are going , consumption is increasing, credit has recovered. We've had a slowdown in economic growth, but recession means several quarters of high-digit GDP declines. We don't have a recession and we don't see, we don't have this forecast. There are several definitions of recession - for example, it's a recession if there are two quarters with a decrease, even if it's a slight one, but I hope we don't get there either. There is a problem with the correction of statistical data. It is not easy to correctly calculate aggregated, global statistical figures, corrections may still appear. But I don't see a recession".

For the end of this year, the BNR forecasts an inflation of 4.7%, compared to 4.8% in the previous forecast, which will decrease to 3.5% at the end of 2025.