Roşia Montană - miraculous win; air and maritime Schengen; Iohannis wants the head of NATO

Political decision-makers in Bucharest continued in the last month of the first quarter of the current year to adopt decisions regarding the extension of some price capping measures and to dilute the provisions of Law 296/2023 and GEO 115/2023 regarding the reduction of expenses in the public sector, adopting several normative acts and memoranda through which salary increases operated and allowed new employment in the state. In this context, the budget deficit of 1.67% of GDP recorded at the end of February continued to grow in the first month of spring, as mentioned yesterday, April 3, by Marcel Boloş, the Minister of Finance who spoke about a deficit on the first quarter of the year of over 2%, but less than 2.5% of GDP - which was the Government's estimate.

In these conditions, no one was surprised that on March 20 the European Commission officials who came to Bucharest to present the annual progress report of our country regarding the implementation of the National Recovery and Resilience Plan declared that, if the PSD-PNL government led by Prime Minister Marcel Ciolacu will not make the reforms assumed in the PNRR, the budget deficit of our country at the end of 2024 will jump by 7% of GDP, well above the 5% target assumed this year by the Executive through the state budget law adopted by Parliament.

Moreover, in the report published on March 25 by the European Commission regarding the macro-economic imbalances in our country, the officials of the Community Executive show that, despite some improvements, our country still faces the vulnerability of tax revenues, and large budget deficits and the high rate of inflation, all of which are above pre-pandemic levels, make the national economy potentially vulnerable to shocks.

The statements of European officials removed the optimism of political decision-makers in Bucharest who announced at the beginning of the month that on March 1 the rating agency Fitch reconfirmed the rating of Romania's government debt at BBB-/F3 for long-term and short-term debt in foreign currency, as well as stable outlook.

The announcement regarding our country's rating came just one week before the international arbitration court attached to the World Bank, ICSID, published the decision in the Roşia Montană case, which rejected the action filed by the Canadian companies Gabriel Resources and Roşia Montană Gold Corporation , and implicitly the compensation of billions of dollars requested by the representatives of the two companies. That decision, the reasons for which would be fully published after 90 days from March 8, was opposed to the statements made in the first two months of the year by Prime Minister Marcel Ciolacu and Finance Minister Marcel Boloş who stated that it looks like our country will lose this lawsuit and that we will have to pay damages of up to 6.5 billion dollars.

Also at the beginning of March (March 6-7), PNL organized the Congress of the European People's Party in Bucharest, an event in which most of the European leaders present - with the exception of the Austrian ones - assured us of their support for our country's entry into the Schengen area and with land borders until the end of this year and where Ursula von der Leyen received the vote by which she was confirmed as the EPP candidate for a new mandate as president of the European Commission.

The EPP Congress also did not approve the launch of the list of PNL candidates for the European Parliament elections on June 9, because the liberals decided to run on a joint list with the social democrats and also established, within the governing coalition, that on June 9 the and local elections.

Regarding international representation, we mention that on March 12, President Klaus Iohannis announced from the Cotroceni Palace that he is entering the race for the appointment of the future Secretary General of NATO and that he is undertaking this candidacy on behalf of Romania.

The main notable event of the first month of spring was recorded on March 31, when our country entered, after 11 years in which it met all the criteria required by the acquis communautaire, into the air and maritime Schengen, thus removing control from the two borders regarding the identity of persons.

• Fitch reconfirms Romania's sovereign rating

The Fitch rating agency reconfirmed on March 1, 2024 the rating related to Romania's government debt at BBB-/F3 for long-term and short-term foreign currency debt, as well as the stable outlook. The decision to reconfirm the sovereign rating and maintain the stable outlook is supported, in the agency's view, by the European Union's membership status and the European Union's capital flows that support the country's real convergence, external finance and macroeconomic stability, as the positive evolution of GDP per capita and governance and human development indicators, which are at higher levels than countries in the same rating category ("BBB"). The assessment mentions both the economic resilience that Romania has shown in the recent period, as well as the political stability that our country has enjoyed since the end of 2021. At the same time, the agency emphasizes the level of public debt lower than countries in the same rating category, the banking sector well capitalized, as well as the downward trend of inflation in our country. In the agency's opinion, Romania's economy will register a growth of 3% in 2024 and 2025, given that our country will benefit from important European funds both from the Multiannual Financial Framework 2021-2027 and from the Recovery and Resilience Mechanism (PNRR) .

Unfortunately, the positive announcement of the Fitch agency was quickly put on the back burner, after on March 20 European Commission officials stated in Bucharest that the budget deficit of our country, instead of decreasing, will increase.

On the occasion of the presentation of the report on the last year's implementation of the National Recovery and Resilience Plan, Declan Costello, Deputy General Director for Economic and Financial Affairs DG ECFIN, said: "We are very concerned about the fiscal situation in Romania. The deficit should have been corrected until this year. The last time we looked at the numbers last year, we were expecting a deficit of over 6% and it was assumed to decline this year. We see the trend going in the wrong direction. The deficit run in the first part of the year is weak. At the moment, I expect the deficit to be closer to 7% of GDP this year. The fiscal deficit combined with the current account deficit is worrying and poses a threat to Romania going forward."

The concern of March 20 was confirmed by the European Commission and in the report published on March 25 regarding macro-economic imbalances in our country. Officials in Brussels note that although at the end of 2023, there has been progress in reducing the current account deficit, through the lens of monetary policy tightening and consumption reduction, risks remain high in the coming years due to unchanged fiscal policies. In its analysis of macro-economic imbalances, the European Commission shows that the main problem regarding the high level of the current account deficit is the underlying fiscal deficit, which has not been sufficiently corrected in recent years. Officials in Brussels argue that the persistence of high government deficits can lead to an increase in foreign indebtedness and increase our country's dependence on external sources of financing, which would represent a major vulnerability for investors, but also for possible external shocks. That is why the European Commission recommends the Bucharest authorities to implement a strict and credible fiscal consolidation program, which will lead to mitigating the risks regarding economic stability.

• The government adopts new measures aimed at deepening the budget deficit

Despite repeated warnings from the European Commission, the PSD-PNL government led by Prime Minister Marcel Ciolacu continued in March to take decisions by which it instituted measures that lead to an increase in budget expenditures, but also to an increase in the number of employees in certain parts of the public sector.

Thus, the Ciolacu Cabinet approved an emergency ordinance by which it maintained the capping mechanism for energy and gas prices until the spring of 2025, although the prices in the free market are lower than those paid by the Government for the capping in the monthly bills of consumers households and industrial consumers. The Executive's motivation for this normative act was the desire to protect the population, but also companies, as final consumers, against the volatility of the energy and natural gas market, in the current conditions of global unpredictability, with war on the border. Also, the normative act provides that the return to the mechanisms of the liberalized market will be done in stages and with the assurance of a fair price for Romanians.

Another measure taken by the Government is the extension, starting from April 1, by three months of the period of application of the maximum RCA insurance premium rates practiced by insurers on February 28, 2023. The Financial Supervision Authority and the Ministry of Finance argued for this measure by combating excessive price increases and the gradual stabilization of the RCA insurance market, in order to avoid negative effects in other sectors of the economy.

We remind you that the maximum premium rates were set at the level of their own premium rates that were applied by each RCA insurer on February 28, 2023, following the bankruptcies of the City Insurance and Euroins Romania companies, with the possibility of these prices being adjusted by a maximum of 6.8%. The rates are applied in the case of RCA contracts concluded after the date of entry into force of the decision.

Distribution commissions related to RCA contracts are limited to a maximum of 8% of the net premium of distribution expenses, for a period of 3 months from the date of entry into force of the decision.

In the normative act by which the price cap on RCA policies was extended, the Government shows that on December 31, 2023, out of the total number of vehicles in the national car park, namely 10,333,293, a number of 7,053,399 vehicles were insured, and that in between January and March 2024, more than 21,000 requests for allocation of high-risk policyholders were registered, which means that each RCA insurer took on a number of approximately 2,600 such policyholders.

Another act with implications on the increase in budget expenditures is the emergency ordinance by which the members of the Ciolacu Cabinet decided last month to stimulate human resources in the health system and in the field of social assistance, by granting a 20% salary increase to 235,000 employees in the health system and 46,000 people employed in social assistance. The budgetary impact estimated by the government is approximately 2.3 billion lei, and the increase is applied in two equal installments, starting from March 2024 and June 2024, respectively.

Through two government decisions, the Executive has approved changes in the status of military personnel, making salary changes for several categories of employees of the Ministry of National Defense and significantly increasing the salaries of the specialists who will handle the Bayraktar drones that will be part of the equipment of the Romanian Army.

Furthermore, the Ciolacu government ordered that the annual limits, related to the years 2024, 2025 and 2026, for repayable financing that can be contracted and for withdrawals from repayable financing contracted or to be contracted by administrative-territorial units/subdivisions, to be 2 billion lei each year (for reimbursable financing that can be contracted) and 3 billion lei in 2024 (for withdrawals from reimbursable financing contracted or to be contracted), with this limit decreasing to 2 billion lei in 2025 and 2026 .

• Increased ceilings for IMM Plus

In addition to these normative acts, the Executive also adopted measures aimed at supporting the business environment in our country. Thus, in the last month of the first quarter of this year, the Government decided on March 7 to approve the continuation of the IMM Plus state aid scheme and its components until June 30, 2024. At the same time, the Executive increased the maximum values for this scheme, from to 2 million euros to 2.25 million euros per enterprise, respectively from 250,000 to 280,000 euros for each enterprise operating in the primary agriculture sector and from 300,000 to 335,000 euros for each enterprise operating in fisheries and aquaculture sectors. The total budget of the state aid scheme is approximately 12.5 billion lei (the equivalent of approximately 2.5 billion euros). Within this budget, guarantees can be granted within the limit of the total ceiling of 11.1 billion lei, the equivalent in lei of approximately 2.22 million euros. Through the implementation of this scheme, it is estimated that state aid will be granted to a maximum of 11,500 beneficiaries.

The aid scheme is implemented by the Ministry of Finance through the National Credit Guarantee Fund for Small and Medium Enterprises S.A. - IFN, Rural Credit Guarantee Fund IFN - S.A. and Fondul Român de Contragarantare S.A.

Also in order to support the companies, the Government decided to establish a state aid scheme with the objective of regional development by stimulating the realization of investments. The state will grant non-refundable financing for investments with a major impact on the Romanian economy, whose eligible costs exceed 50 million lei.

The average annual budget of the scheme is 749 million lei (149 million euros). The maximum budget of the scheme is 2.24 billion lei, equivalent to 449 million euros. Following the application of this scheme, a number of 150 enterprises would benefit. The payment of the state aid will be made in the period 2025-2032.

In the meeting of March 28, the government modified several provisions of law 296/2023 and GEO 115/2023, normative acts by which it instituted several measures last year to ensure the fiscal sustainability of our country. The main fiscal changes adopted at the end of last month are:

- The introduction of the regime for marking with tax stamps and products containing tobacco, intended for inhalation without burning, similar to that applied to processed tobacco products, considering the need to comply with the obligation to put them on the market, starting from 20 May 2024, of unitary packages of tobacco products;

- The introduction of the obligation to store the received products only in the premises declared and authorized for the receipt of excisable products, in the situation where the direct delivery option is not used, as well as the introduction of an offense for non-compliance with this obligation, in order to avoid evading the legal provisions regarding advance payment of excise duties in the case of registered recipients;

- regarding the sanctioning of companies from April 1 for not submitting invoices within 5 working days in the RO e-Invoice system, it was extended until May 31, 2024, including the period in which no sanctions are applied for this act; the measure was taken in order to ensure the necessary conditions for taxable persons to continue adapting their procedures/systems for submitting invoices in the national RO e-Factura electronic invoice system, without incurring fines.

• The Ministry of Finance continues to borrow

And during the last month, the Ministry of Finance had to borrow by issuing medium and long-term state securities and bonds.

At the beginning of March, the Ministry of Finance announced that the total amount invested in the first edition of the Fidelis Program in 2024 was over 1.79 billion lei. Emissions in euros were the most accessed in this edition, with a total of over 190.53 million euros. Thus, the issue in euros with a maturity of 1 year and an interest rate of 4%, had a total of over 118 million euros, the equivalent of 590 million lei, placed in the 3,755 orders. The second issue in euros, with a maturity of 5 years and an interest rate of 5%, had a total of over 72.53 million euros, the equivalent of 362 million lei, placed in 2,716 orders.

Regarding issues in lei, investors placed over 708.575 million lei, in 5,970 orders. Government bond issues in lei had maturities of 1 year and 3 years and annual interest rates of 6% and 6.75%, respectively.

On March 13, the Ministry of Finance launched the fourth edition of Tezaur government bonds, with tax-free interest of up to 6.85% per annum. The respective securities have maturities of 1 and 3 years, with annual interest rates of 6.10% and 6.85%, respectively, a nominal value of 1 leu and are in dematerialized form. Since the beginning of this year, through the 3 previous issues, investors have bought Tezaur government bonds worth over 3.2 billion lei.

The budget execution published by the Ministry of Finance for the month of February showed a deficit of 28.99 billion lei, respectively 1.67% of GDP compared to the deficit of 17.04 billion lei, respectively 1.07% of GDP for the two months of the year 2023, a deficit that deepened until the end of March 2024 to over 2%, according to yesterday's statement by Minister Marcel Boloş, who admitted that from the preliminary data for the last month of the first semester, the budget deficit amounts to a value that is below 2, 5%, as much as the Government's initial estimate for this period.