L. Anghel: Romania’s budget deficit, likely to jump to 5%

The highest deficit among CEE8 countries should be in Romania, where the absence of changes in fiscal policy entails a fiscal deficit of roughly 7% of GDP, as most of the approved bills in the election year (2008) bear their full costs in 2009. However, it is very likely that markets will force the Romanian government to open the budget and make changes alone, rather than with the IMF, which would result in higher political costs.

Erste analysts believe that Romania’s call for IMF help will be bond-supportive, as the program would offer a credit line that would reduce the net issuance of government bonds and trigger more aggressive monetary easing.

“Although the 2009 budget draft in Romania is very ambitious in terms of cutting public spending, postponing some wage hikes and suspending bonuses in the public sector, we see the cap for the budget deficit at around 5% (2% is the government’s target)”, said Lucian Anghel, chief economist at Banca Comerciala Romana.

The Romanian government has thus far only announced a stimulus package, but it remains to be seen if it this is to be included in the final 2009 budget (after it is approved by Parliament). The central bank’s support in financing the budget deficit in 2009 is very important, while Eurobonds should be seen as a second option and only for smaller amounts.

“At the same time, securing additional funding from an international financial institution to fund the budget deficit could have positive effects on the FX rate, as well as on credibility, and improve investor sentiment towards the Romanian market”, BCR’s chief economist noted.

The highest gross issuance will be in Hungary, Erste analysts forecast, as a big amount of government debt (19% of GDP) matures in 2009. However, given the agreement with the IMF/EU, which should roll over about 5% of maturing debt, the Hungarian government will not need to go on foreign markets to borrow and the net issuance will be negative and done in local currency only.

At the end of the day, there will be less outstanding Hungarian government securities on the market compared to 2008. Thus, the local market should be able to absorb the supply of government securities just by rolling over maturing securities. Besides the negative net issuance, the short-term rates heading south should also be supportive of government securities.

In October last year, Hungary was the recipient of a 20 billion euros standby loan from IMF, in an effort to avoid a payment default during credit crisis.

“As the decline of GDP in 2009 is likely to be below the planned -1% y/y in Hungary, revenues worth around 1% of GDP could be missing from the budget. This suggests that the cap for the fiscal deficit this year is 3.5-3.6% of GDP” stated Orsolya Nyeste, macro-analyst at Erste Bank Hungary.

All in all, capital markets would not tolerate a higher budget deficit than 3% of GDP, nor would the IMF. According to Erste’s base forecast, however, is that the 2.6% of GDP deficit goal will remain untouched, as – by increasing its credibility - it should make it easier for the country to shift from the current non-market-type financing (IMF loan) to market-type financing, as soon as possible.

Due to the IMF standby loan, it should not be any financing difficulties in the short run, but as this situation is artificial, there is still no way for Hungary to significantly increase its financing needs, Orsolya Nyeste stated.

Most promoted stimulus packages are either repackaged expenditures or more efficient drawing and co-financing of EU funds.

Some mild tax cuts are being discussed in Slovakia and the Czech Republic, but, in most cases, fiscal deficits should stay below or close to 3% of GDP.

“Based on revised growth forecasts, we now expect Slovakia's fiscal deficit at close to 3% of GDP, even if no new major spending initiatives are carried out (the government intends to find funds by reshuffling expenditure)” explained Michal Mušák, macro analyst at Slovenska Sporitelna.

The government should have no problem raising extra funds, he added, as in late 2008 people brought money from under their pillows to banks ahead of euro adoption. This year, demand at government auctions has been heavy, as banks sought to invest these new deposits.

“In general, we expect that the contraction of strong credit growth in CEE8 and the growing market of pension funds, mainly valid for Poland and Slovakia, will increase the demand for government securities of about 1-2% of GDP” points out Juraj Kotian, co-head of CEE Macro & Fixed Income Research at Erste Group.

The banking system in Slovakia has a liquidity excess of almost 20% of GDP. Thus, banks will be in a hurry to place this excess liquidity in government bonds, rather than put it on central bank deposits at low interest rates.