STILL ON AN UPWARD TREND The public debt exceeds the threshold from the law on budget deficit restrictions

The Ministry of Finance officially announced yesterday that it successfully raised USD 3.3 billion from foreign capital markets, which has led to Romania's public debt exceeding the 40% threshold in relation to GDP established by the law on budget ceilings, normative act approved in early January, following the initiative of the Orban government.

At the end of May, according to recent data from the Ministry of Public Finance, the government's public debt amounted to 39.9% of GDP, (428.37 billion lei), but that only applies with the nominal GDP of 1,072 billion lei, according to the INS communique from July 7 on GDP dynamics in the first quarter, which showed a 0.3% quarter-on-quarter increase. However, the dynamics of nominal GDP would be negative this year amid the Covid-19 crisis, given that analysts and macro-prudential institutions expect an economic contraction between 4 and 6%.

Exceeding the 40% threshold generates no effects, but it naturally shows that the debt is increasing. If this year the massive loans started by the Ministry of Finance are to cover the same massive financing needed - over 120 billion lei amid a general rising trend in every category of budget expenditure, despite the crisis -, the pertaining payments will remain in the debt service account, which just this year alone amounts to about 47 billion lei after the fiscal drift of the PSD in the last 3 years.

However, the law on fiscal responsibility, amended in 2013, specifies several thresholds that require Government measures: 45% of GDP, 50%, 55% and 60% of GDP, the latter being the threshold of the Stability and Growth Pact for joining the euro area. The introduction of the 2013 thresholds means that exceeding them will lead to actions by the government: if the public debt exceeds 45% of GDP, the Ministry of Public Finance draws up a report to justify the increase in debt and presents proposals to keep that indicator at a sustainable level; if the level of indebtedness exceeds 50% of GDP, the government freezes public sector wages and possibly adopts additional debt reduction measures, and if the indicator is higher than 55%, social welfare expenditures in the public sector will also automatically freeze (including pensions).

All these provisions aim to prevent the situation in which the public debt would exceed the threshold of 60% of GDP, stipulated in the Maastricht Treaty.

The estimates of the Ministry of Finance for 2020 indicate a level of 40.9% of public debt, but which has not been updated, given that it is working with an economic contraction of just 1.9% this year, a decline seen in the market as unrealistic. However, the estimates of the Fiscal Council show that Romania would exceed this year the first alert threshold in the law of fiscal-budgetary responsibility (45%), and in the following year the threshold of 55%, in the most pessimistic scenario.

Thus, the Fiscal Council states that the public debt could increase massively in the next two years, from 35.2% at the end of 2019 to over 54% in 2021, or even higher if the GDP growth rate is below potential next year. The need for financing is estimated to remain high in 2021, above the financing capacity of the banking system in our country, which will require loans from foreign markets that involve a currency risk. It should be noted that the ratio of public debt to GDP ratio can only be reduced if the increase in nominal GDP is higher than the increase in the stock of public debt.

"According to the calculations of the Fiscal Council, an accelerated increase in public debt is forecast over the next 2 years, to 45.9% of the GDP in 2020, and 54.3% of GDP in 2021, respectively, surpassing the thresholds of 45% and 50% provided by the law on fiscal and budgetary responsibility. Under other scenarios, more unfavorable for the real GDP growth rate and the evolution of the interest rate, the indebtedness rate could reach 56.7%, a value close to the 60% reference level, according to the excessive deficit procedure. At the same time, the steep advance of public debt is expected to lead to a rapid increase in financing needs, raising a number of important challenges regarding the limited debt absorption capacity of the internal market, uncertainties about the availability of financing in foreign markets and future developments. In this context, an important resource for financing the economy, starting in 2021, may be the proposed economic recovery plan proposed by the EC, through which Romania would receive about 33 billion euros", the Council's report states.

The Fiscal Council also points out that "it is not the public debt that is the biggest problem for public finances, but the large and growing deficits, very high pressures on the public budget, which require major corrections in the coming years."

The law on fiscal responsibility stipulates that the freezing of expenditures must be achieved through laws passed by the Parliament, with short-term applicability. However, there are some exceptions in the event of extraordinary circumstances, such as the coronavirus pandemic.