Crucial week for Romania. IMF aid deal at risk of being interrupted

International Monetary Fund, World Bank and European Commission will arrive this week to carry out a follow-up mission in Romania, to assess the country’s compliance with the conditions for receiving the third tranche under the €20 bln aid deal. The conclusions of the review will determine whether Romania qualifies for receiving the third tranche under the SBA, but sources closed to the issue said the political turmoil was likely to put the IMF deal at risk.

Follow-up mission to assess the country�s economic performance

International Monetary Fund and World Bank are expected to arrive in Romania this week, although it is still not known whom they will meet. Boc’s Cabinet collapsed and has no room for maneuver, while the government formed by designated PM Lucian Croitoru waits for the vote of confidence from the Parliament.

Initially, IMF and WB’s visit had been postponed until a new government emerged. Shortly after, the two institutions changed their plans and decided to conduct a follow-up mission.

IMF will thus send a mission to Bucharest for October 28 – November 9 to initiate a round of talks with the Romanian authorities for a second review under the SBA, however, further consultations could be needed after a new government is formed.

“In response to the request made by the President of Romania, IMF will send a mission to Bucharest for October 28 – November 9”, said IMF’s mission chief, Jeffrey Franks.

During this visit, IMF will assess the recent economic performance of the country and will discuss with the authorities the economic objectives for next year, as well as economic policies and structural reforms that the country needs to meet these goals.

“The successful completion of the second review will require a broad-based political commitment for passing the 2010 budget that would envisage a maximum budget gap of 5.9%. After reaching an agreement on core macro and fiscal policies for running the program, the executive board of IMF will meet to discuss the report, which would determine the disbursement of the 1.409 DST (€1.5 bln) tranche”, IMF mission chief said.

European Commission said it would send a mission to Bucharest to assess the country’s balance of payments compliance with the conditions under the financing package deal.

ING: there is no guarantee that Romania will receive the third tranche easily

The IMF’s decision to initiate the second review should calm the local markets in the short term as fears about delays in disbursements would lead to an increase in the risk premium for Romania and growing pressures for leu weakening, ING’s senior economist Nicolaie Alexandru Chidesciuc said.

“Jeffrey Franks said that successful completion of the second review will require a broad-based political commitment to approve a 2010 budget with a budget deficit no higher than 5.9% of GDP”. Nevertheless, although we are in October 2009, there is no budget approved for 2010 and this is set to persist until a new government is formed; only afterwards will the new budget should be submitted for parliament’s approval”, ING’s economist said.

For this year, IMF’s budget gap target is around 7.3% of GDP, but ING analysts see a deficit of 7.7% and don’t rule out a wider deepening. Jan-Sep data indicates a budget deficit of 5% of GDP, according to minister of Finance, Gheorghe Pogea. For 2010, IMF agreed on a reduction of the gap to 5.9% of GDP.

Therefore, even if the IMF comes to Romania for the second review, there is no guarantee that Romania will receive the third tranche easily. For comparison, when the government collapsed in Latvia in February 2009 the IMF delayed the disbursement of a tranche from March until August. The money came after additional austerity measures were passed for the 2010 budget. So, even back then, the IMF strongly emphasized 2010 budget plans. At the same time, the IMF could adopt a softer approach on Romania again”, said Nicolae Alexandru Chidesciuc.