The government increases the budget expenditures, wins the "composed" elections and donates weapons to Ukraine

The budget deficit continued its decline in the second financial quarter as well, its growth being a little smoother compared to the first three months of 2024. Thus, if at the end of March the budget deficit recorded for the first quarter stood at 2, 06% of the Gross Domestic Product, at the end of June, according to the preliminary data of the Ministry of Finance for the last month of the 2nd quarter, the budget deficit reached 3.61% of the GDP, which led the Government to outline a negotiation strategy with the future composition of the European Commission regarding reaching, only in 2027, the budget deficit target of 3% of GDP, especially since at the end of 2024 we will not fall within the 5% target established in the state budget law approved by the Parliament in December 2023.

Under these conditions, the PSD-PNL government led by Prime Minister Marcel Ciolacu continued, through the Ministry of Finance, to borrow from the banking market in the second quarter with the amounts needed to refinance the public debt and finance the state budget. According to the monthly schedules carried out by the Ministry of Finance, the state borrowed 18 billion lei from commercial banks for this purpose, an amount to which were added several tens of billion lei resulting from the monthly issuance of new state securities and new bonds intended to bring to the budget the revenues necessary to support public expenses. Following these actions, according to official data, the Romanian state has recorded contracted loans of 135 billion lei from the beginning of 2024 until the end of the second quarter.

The need for financing increased in the 2nd quarter with the start of new aid schemes for SMEs, for farmers, with the granting of state aid of 100 million euros for the company Tarom, with the 10% increase in salary income for a third of the employees of the public system, but also with the continuation of the employment of thousands of people in the local and central public administration, but also in the health and social assistance system, during the entire period. The respective measures were also taken in the light of winning the goodwill of citizens with the right to vote in the context of the elections for the European Parliament and the local elections that took place on June 9 and that ended with the decisive victory of the two parties in the governing coalition: PSD and PNL.

So, in order to cover part of the budget expenses, in May the Government decided to increase the total value of the "Medium Term Notes" (MTN Program) from 68 billion euros to 75 billion euros. According to the government decision, the measure is necessary to cover the financing needs from foreign markets for the year 2024, as well as to create the necessary flexibility for the pre-financing of the needs related to the year 2025.

Under these conditions, the European Commission warned twice that our country will not respect the budget deficit target of 5% of GDP negotiated last year for the end of 2024 and that a deficit of 7% of GDP will probably be reached. Despite the warnings received from Brussels, the Ciolacu government decided to increase the gross minimum wage in the economy to 3700 lei from July 1, 2024.

In order to look for new sources of funding, Prime Minister Marcel Ciolacu made a series of official visits to the United Arab Emirates, Qatar and Dubai, where he presented the large infrastructure projects that have not yet obtained funding from the European Union and that could be financed by businessmen from the Gulf area, the value of the respective projects amounting to 15 billion euros.

In view of the above situation, but also the maintenance of domestic consumption at fairly high rates, throughout the 2nd quarter the Board of Directors of the National Bank of Romania, in order to keep inflation under control, decided to maintain the policy interest rate monetary policy at 6% per annum, maintaining the interest rate related to the lending facility (Lombard) at 8% per annum and maintaining the interest rate related to the deposit facility at 6% per annum, although in the last month of the 2nd quarter the European Central Bank decided to reduce the monetary policy interest rate by 0.25 percentage points.

The 2nd quarter brought to us externally the participation of President Klaus Iohannis at the summit of the Three Seas Initiative and at the summit of the European Council, but also his withdrawal from the race for the position of Secretary General of NATO for which he had announced his candidacy in March. Not receiving the important support of the US, France and Germany, after a discussion at Washington with Joe Biden, US President Klaus Iohannis decided to withdraw from the race, but to comply with the US President's request to send a Patriot system to Ukraine. Thus, in the meeting in June, the members of the Supreme Council of the Defense of the Country decided that the first operational Patriot system in our country, worth over one billion dollars, should be donated to Ukraine, following that the American partners should operationalize as soon as possible one of the other six systems purchased by Romania, which happened until the end of June.

At the end of this preamble, we remind you that in June the Romanian men's national football team managed, after 24 years, to get out of the first place in the group of the Euro 2024 final tournament, after passing 3-0 Ukraine lost 0-2 to Belgium and drew 1-1 with Slovakia. Unfortunately, the national team's road to Euro 2024 stopped in the round of 16, when Romania lost 0-3 to the Netherlands, after a game dominated by the Batavian players. Euro 2024 also recorded a first: in the four matches played on German grounds, the Romanian football team was supported by more than 100,000 compatriots in the stands of the stadiums.

• April - Banning of small towns, Firea becomes the PSD candidate for the Capital City Hall

Apart from the problems related to the increase in the budget deficit, the PSD-PNL governing coalition faced in the first month of the second quarter with the media revelations about how the doctor Cătălin Cîrstoiu - the candidate of both parties for the position of general mayor of the Capital at the elections of June 9 - he made his fortune, based on at least a moral incompatibility between the position he held - as general manager of the Bucharest University Hospital - and the clinic owned by his wife where the doctor treated several patients who had previously gone through the public hospital. The scandal ended only on April 23, when the leaders Marcel Ciolacu and Nicolae Ciucă gave up Cîrstoiu's candidacy, and the PSD and PNL teams mobilized to collect the necessary signatures to submit the candidacies for the position of general mayor of the Capital of Gabriela Firea and Sebastian Burduja, the two candidates stating that they will not attack each other in the electoral campaign and that their goal is to remove Nicuşor Dan from the head of the Bucharest municipality administration.

Financially, despite the budget deficit of 2.06% of GDP recorded at the end of March, the Government continued in April the policy of increasing some budget expenditures, including for investments made by local public administrations, but also for financing schemes of energy investments and those intended for small and medium enterprises. Since revenues were needed to finance budget expenditures, the Ministry of Finance launched, in mid-April, a new issue of Tezaur government bonds, after in the first part of that month it managed to attract almost 3.2 billion lei from the second current year edition of the Fidelis bond issue.

However, the Ministry of Finance and the Government as a whole received good news from the Standard&Poors agency, which in April maintained Romania's government debt rating at BBB-/A3 for long-term and short-term foreign currency debt, as well as the outlook stable. Moreover, in order to explain to international investors the new fiscal measures in our country, Marcel Boloş, the Minister of Finance, went to Washington in April where he had meetings with the representatives of the International Monetary Fund and the main investment funds, but also with the representatives of the Standard&Poors and Moody's rating.

The government continued to support SMEs, approving on April 23 an emergency ordinance that started a new stage of the Electric Up financing program, for the installation of photovoltaic panels and the purchase of electric charging stations. Through the new Electric Up2 program, a de minimis aid of up to 150,000 euros is granted for each beneficiary. The Electric Up2 program will be financed from the state budget with 450 million lei.

Moreover, after the approval of the IMM Plus state aid scheme by the European Commission on April 9, the Ministry of Finance published the Joint Order by which it established the guarantee ceilings for components, the rules for managing the guarantee ceilings, the payment of state aid specific to each components of the state aid scheme, as well as grant guarantee and payment conventions and implementing conventions. The budget of the scheme is 12.5 billion lei, and guarantees will be granted within a ceiling of 11.1 billion lei, for 11,500 beneficiaries. The companies that applied for IMM Plus and its components - IMM România Plus, Agro Plus, IMM Prod Plus, Construct Plus, Innovation Plus and Rural Plus, the scheme being valid until June 30, 2024.

In order to finance part of the large infrastructure projects in our country, Prime Minister Marcel Ciolacu, accompanied by some members of the Government, traveled, between April 16-18, to Qatar and the United Arab Emirates to have discussions with the authorities there and with investment funds from the Gulf area. The declared purpose of the official visit was to attract 15 billion euros for the development and modernization of Constanţa Port, Traian Vuia International Airport in Timişoara, for the construction of the Comarnic-Braşov Highway and the modernization of the Predeal-Braşov railway.

The first month of the 2nd quarter also recorded a consensus at the legislative level, with the Parliament adopting the ban on grocery stores in towns with less than 15,000 inhabitants, a measure which, according to industry representatives, would negatively affect over 200 small and medium-sized companies that operates in this economic sector and which will reduce revenues to the state budget. The law was promulgated by President Klaus Iohannis and entered into force on April 29.

• May - Damen files for bankruptcy of the Mangalia Naval Shipyard, Florian Coldea - prosecuted by the DNA

Despite the budget deficit of 3.24% of GDP recorded at the end of April, the Government continued to increase budget expenditures, although citizens would have expected them to be reduced, given that, according to ANAF and the Ministry of Finance reports, it turns out that more money has been collected in the state budget, but the expenses far exceed the income. Instead of taking the necessary measures, the members of the Ciolacu Cabinet adopted new emergency ordinances and government decisions by which they established salary increases - the increase of the minimum gross salary per country to 3700 lei from July 1, the 10% increase in salaries for several categories of budgetary employees -, new staff hires (2700 new employees only in the sanitary field and 220 at ANAF) and the granting of new financing for farmers and for companies.

Moreover, during May, the Government approved the granting of an individual state restructuring aid for the national Romanian air transport company, Tarom SA, aid that was previously approved, on April 29, by the European Commission. According to the government decision, the value of the state aid amounts to 471 million lei, approximately 94.67 million euros. Of this amount, 214.3 million will be used by Tarom to cover the liquidity deficit and financial balancing of the company in 2024. Considering the need to make urgent payments in June 2024 related to the purchase of the new B737 MAX aircraft, first installment of the restructuring aid, in the amount of 60 million lei, will be granted from the Reserve Fund at the disposal of the Government.

All these budget expenses, however, need financing and, in order to have the necessary money, the Government decided to increase the total value of the "Medium Term Notes" State Bonds Framework Program (MTN Program) from 68 billion euros to 75 billion euro. According to the government decision, the measure is necessary to cover the financing needs from foreign markets for the year 2024, as well as to create the necessary flexibility for the pre-financing of the needs related to the year 2025. The sum of 7 billion euros is intended to cover an emission plan estimated by 10.5 billion euros for 2024 and an estimated 8.5 billion euros for 2025. In addition, the Ministry of Finance continued to borrow from the population during the last month of spring, after on 13 May launched a new issue of TEZAUR government bonds, with maturities of 1 and 3 years, with annual interest rates of 6% and 6.85%, respectively.

At the macroeconomic level, at the end of May the Dutch Damen group asked the Constanţa Court to declare the bankruptcy of the Damen Mangalia Naval Shipyard, in which the state is the majority shareholder with 51% through the Ministry of Economy, Entrepreneurship and Tourism through the state company Shantierul Naval 2 Mai Mangalia. The bankruptcy was requested under the conditions that, after the entry into force of the new law on corporate governance in companies in which the state is the majority shareholder, the Damen group is going to lose the managerial and operative management of the shipyard and announced as early as last August that in these conditions are withdrawn from Mangalia. For the investments made in Mangalia, Damen claim that the Romanian state should pay them 160 million euros, an amount for which they have also opened an international arbitration procedure at a specialized court in Vienna, Austria.

Also in May, we recorded the visit of President Klaus Iohannis to the USA, who after the meeting with Joe Biden returned home in a worse position than when he left. Set out to meet withJoe Biden from the position of our country's candidate for the position of Secretary General of NATO, which will remain vacant in October after Jens Stoltenberg's mandate expires, Iohannis faced the American president's refusal to support this candidacy and was not elected either at least with a promise to support the USA in case of occupying a position at the European level. Moreover, President Biden added and suggested to Klaus Iohannis that our country give Ukraine a Patriot system for defense from those ordered from the USA, given that of the seven systems purchased, only one is operational in Romania.

The only external victory registered in May was the decision of Turkish President Recep Tayip Erdogan to allow Romanian citizens traveling to Turkey for tourist purposes to enter the country on the basis of their identity card, the stay being allowed for a maximum of 90 days during a period of 180 days. Instead, Prime Minister Marcel Ciolacu discussed with the President of Turkey the possibility of several companies from that country participating in the implementation of infrastructure projects in Romania.

Internally, we also note that on May 24 the National Anti-Corruption Directorate announced the start of the criminal investigation on behalf of former SRI generals - Florian Coldea and Dumitru Dumbravă - and lawyer Doru Trăilă, who allegedly promised businessman Cătălin Hideg that they would influence the magistrates for to change his sentence of criminal conviction handed down by the trial court. The three would have asked Hideg to pay 600,000 euros, of which the businessman would have paid 100,000 euros. The prosecution of Coldea has inflamed a part of civil society and the media, which over the years have accused the former SRI general of establishing the so-called parallel state.

• June - Ciolacu and Ciucă win the elections

The first month of summer was more hectic than usual due to the fact that, in addition to the budgetary problems faced by the Government, on June 9 we had European parliamentary and local elections, new amendments to normative acts in the field of taxation, but also the continuation of the policy of budget rectification through the decisions by which the Ciolacu Cabinet supplements the amounts allocated to the subordinate ministry, a policy criticized many times by the Fiscal Council.

The best news for the leaders of the PSD-PNL governing coalition, Marcel Ciolacu and Nicplae Ciucă, came in the evening of June 9, when they found out that they had won the European parliamentary elections and the local elections, which they combined on the same day. with the stated aim of isolating extremist parties. Following the elections for the European Parliament, the PSD-PNL alliance won the lion's share, with 48.55% of the votes, which was equivalent to sending 19 deputies out of the 33 that our country has to the European Parliament. The rest of the seats were distributed as follows: AUR - 6 deputies, ADU - 3 deputies, UDMR - 2 deputies, S.O.S. Romania - 2 deputies and one seat for the independent candidate Nicolae Ştefănuţă.

The unpleasant surprises in these elections for the European Parliament were the vote given to far-right parties and the below-expected score recorded by the United Right Alliance (USR-FD-PMP), a score that led to the resignation of Cătălin Drula from the position of president of USR, at the organization of fast-forward internal elections within the respective political formation, elections after which Elena Lasconi - the re-elected mayor of the Câmpulung Muscel municipality - became the president of the USR, and after the June 29 Congress, the party's candidate for the position of president of Romania at presidential elections scheduled for November 24 (first round) and December 8 (second round).

We mention that during the vote for the European Parliament, 52.4% of the total number of voters in our country were present at the polls, i.e. more than 8.9 million Romanians voted, while in the local elections 8.5 millions of citizens with the right to vote.

The two governing parties also won the local elections for mayors, local councilors, county councilors and county council presidents. Following the vote for the local elections, the Central Electoral Bureau recorded the following results: PSD - 34.92%, PNL - 29.73%, AUR - 6.36%, United Right Alliance (USR - PMP - Forţa Dreptei) - 5, 76%, PSD-PNL electoral alliance (in some urban localities) - 5.36%, UDMR - 4.42%, independent candidates - 3.79%.

Among the surprises recorded are the re-election of Nicuşor Dan as general mayor of the Capital with 47.94% of the votes, the re-election of Elena Lasconi (USR) and Dominic Fritz (USR) as mayors in Câmpulung Muscel and Timişoara, the loss of the elections in Sector 1 of the Capital by the incumbent mayor Clotilde Armand (USR) in favor of the liberal George Tuţă, the victory of the independent Mihai Poliţeanu at the Ploieşti town hall, the victory of the liberal Valeriu Iftime in the Botoşani County Council, but also the loss of the leadership of the Suceava County Council by the liberal leader Gheorghe Flutur.

The mandates of mayors, local councilors, county councilors and presidents of county councils elected on June 9 will begin on November 1, 2024.

Regarding the macroeconomic situation, although the budget execution for May published on June 28 by the Ministry of Finance showed a budget deficit of 3.4% of GDP, i.e. 60.1 billion lei, the Government continued to take measures to increase the envelope of budget expenditures . Thus, the Executive decided to supplement the SME Plus state aid scheme with 2.49 billion lei, decided to positively rectify the budget of the Ministry of Transport through two government decisions by which it allocated over 4.5 billion lei, but also to start new investments - a hospital in sector 6 of the Capital worth 145.8 million euros, for which money will be allocated from a loan taken from the Development Bank of the Council of Europe and from the state budget, and a football stadium in the municipality of Slatina , in a total amount of 397 million lei, the amount to be provided also from the state budget. The Ministry of Finance (3 billion lei) and the Ministry of Development (1.36 billion lei) also benefited from positive rectification through government decisions.

In order to counteract the increase in budget expenses, the Ciolacu Cabinet also took a set of measures aimed at improving the collection of revenues at the state budget and also increasing some taxes. Thus, on June 13, the Executive decided to increase by 10.4% - the rate of inflation, all mining taxes provided for by the mining law 85/2003, after which on June 21 it shocked the entire business environment, by adopting two emergency ordinances , without prior consultation of the social partners, normative acts that modify the e-Invoice system and introduce the e-VAT system.

Regarding the e-Invoice, the Government decided to extend the use of the electronic invoicing system also for transactions between businesses and final consumers (B2C), optionally from July 1, 2024 to December 31, 2024 and mandatory from January 1, 2025. In regarding e-VAT, the Government has decided to introduce the pre-completed VAT return that must be modified and/or completed and submitted by taxpayers by the 25th of each month. Following protests from the private business environment, the Government decided that, until January 1, 2025,

no penalties will be applied for not submitting the response to the "RO e-TVA Compliance Notice" if there are inconsistencies between the data uploaded into the system by economic operators and those held by state institutions.

The measures taken by the government in the first two quarters regarding budget expenditures were criticized by the National Bank of Romania in the financial stability report for the first semester published in June, which shows that there are several systemic risks and vulnerabilities regarding the national economy and to the state of public finances. Among the vulnerabilities cited in the report, we mention the high share of undercapitalized companies, the increase in the number of insolvency procedures initiated and the low degree of financial intermediation. BNR experts also show that in the short term, the most important risk factors for financial stability in Romania are: global uncertainties in the context of the war in Ukraine and the conflict in the Middle East, the tension in internal macroeconomic balances, the level and persistence of twin deficits in our country, the risk of non-payment of loans contracted by the non-governmental sector and the risk associated with challenges to cyber security and financial innovation.