The government is considering signing a new preventive deal with the IMF and the EU, in a move economists say will increase foreign investors’ trust and support the restructuring of state-owned companies.

Ovidiu Posirca

Romania successfully sealed a EUR 3.5 billion standby agreement with the IMF earlier in June, part of the EUR 5 billion deal signed with the IMF and the EU. The two-year loan was treated as precautionary with no request from the authorities to draw under it. This was not the case in 2009, when Romania borrowed EUR 19.95 billion from the IMF, World Bank and EU to prevent a Greek-style collapse of the economy.

Under the recently completed loan, the IMF gave Romania sticks and carrots meaning that additional installments would be unlocked providing that Romania moved ahead with privatizing minority stakes in state-owned enterprises (SOEs) through the stock exchange and appointing professional managers and boards at the helm of these companies. In addition, the country has to keep a tight grip on the public finances and reduce the deficit to below 3 percent of GDP.

This is an ongoing process and economists say that applying for a new preventive loan would provide additional guarantees that these reform measures get through.

Putting the financial seatbelt on

The government has already sent a letter of intent as it seeks to sign a new standby agreement with the IMF, the World Bank and the EU. The negotiations will begin shortly after the official visit of Christine Lagarde, the IMF’s managing director. She is due in Bucharest between July 15 and 16 and will meet with the authorities and representatives of the private sector, civil society and academia.

Lagarde will deliver a speech on Romania and Eastern Europe that aims to identify the new growth sources for the region.

PM Victor Ponta expressed his confidence that a new deal could be struck by autumn, although he did not mention the amount of financial support. President Traian Basescu also voiced his agreement regarding the sealing of a new agreement with international lenders.

The recommendation of a new loan came earlier this month from the central bank governor Mugur Isarescu, who argued it would help Romania get cheaper financing on the international markets.

“It it’s good, to still have an agreement with the IMF and/or the EU, to ensure the financing of a lower budget deficit, which means access to capital markets, to ensure this financing at relatively low costs,” said Isarescu, quoted by Agerpres newswire.

Representatives of Volksbank said that a new standby deal would build confidence in the local economy from the vantage point of international financial institutions.

Signing a new loan agreement will consolidate trust through the guarantee that reforms will be continued, reckons Florian Libocor, chief economist at BRD – Groupe Societe Generale.

“The financial component of the agreement should remain precautionary, without being accessed. In fact, if it gains the trust of investors, Romania wouldn’t have any reason to access the financing through the agreement,” Libocor told BR.

On the other side, representatives of foreign investors say that the completion of a new precautionary program would boost their confidence in Romania and protect it from any potential external shocks.

Susan Garro, economic attaché at the US Embassy Bucharest, said, “Continuing to work with the IMF, as Romania has indicated it would like to do, is something we support. Romania’s successful completion of a new standby program would provide a solid foundation for future growth.”

“American investors are looking for stability, transparency and predictability, and a long-term commitment to economic reform; successful implementation of Romania’s commitments to the IMF and other international organizations are indications of Romania’s commitment to reform,” she told BR.

According to the Romanian Ministry of Justice, US direct investments exceeded USD 1.12 billion as of May 2013. This figure does not include US investments made through European subsidiaries. Meanwhile, American merchandise exports to Romania surpassed USD 830 million, while Romanian exported goods worth USD 1.6 billion to the US.

Arnulf Gressel, commercial attaché at the Austrian Embassy’s Commercial Section, commented that signing a new precautionary loan would increase international confidence in Romania as a business location.

“However, it is only one of many factors that affect investors’ decisions. But certainly this economic program would foster this confidence and render the economy less exposed to fluctuations and irregularities. Furthermore, granted aid helps to strengthen Romania’s ratings,” Gressel told BR.

Austria is the second largest foreign investors after the Netherlands. There are over 6,500 companies with Austrian equity in Romania, which have made local investments of around EUR 9.4 billion. Austria’s exports to Romania rose by 3.7 percent to EUR 1.9 billion in 2012, while imports from Romania fell by 1.2 percent to EUR 1.1 billion, according to Advantage Austria.

Florin Eugen Sinca, chief analyst at BCR, commented that a new IMF-backed loan would reduce the risks associated with the repayment calendar of the IMF loan in 2013 and 2014, of around EUR 5 billion yearly, against the backdrop of an unpredictable external environment.

He commented that this loan could act as a new safety belt on international markets and foreign direct investment could next year exceed the current levels of EUR 1.5 billion to EUR 2 billion.

Lending an IMF hand to restructure state-owned players

Sinca of BCR reckons that the main benefit for Romania stemming from a new IMF deal would be the acceleration of the restructuring of SOEs.

“We believe that Romania can add at least 1 percent of GDP to the average economic growth rate in the coming years if it completes the restructuring of SOEs in energy and transport, which could represent annual growth rates of close to 3 or 4 percent of GDP,” Sinca told BR.

He added that SOEs currently account for almost half of the economic activity in the energy sector and a third of the transport sector, putting a drag on economic growth. Sinca suggested the listing of stakes on the Bucharest Stock Exchange (BSE) and other regional stock exchanges, privatization through direct negotiations with investments, and the appointment of professional managers as means to restructure these companies.

The Ministry of Finance boasted that it was able to complete the EUR 3.5 billion standby agreement with the IMF because the government had enforced all the prior measures that were included in the agreement.

Data from the Ministry of Finance show that arrears, which include overdue wages as well as overdue payments to suppliers, creditors and for interest, dropped from RON 838 million (EUR 188 million) in December 2011 to RON 170 million (EUR 38.1 million) in May. Hospital arrears are treated separately.

The ministry added that the privatization of railway operator CFR Marfa and the secondary public offering (SPO) of a 15 percent stake in state-owned gas transport company Transgaz were also part of the IFM deal.

Romanian Grup Feroviar Roman (GFR), a railway freight operator, snapped up 51 percent of debt-ridden CFR Marfa for EUR 202 million, pledging another EUR 200 million in investments.

The SPO in Transgas raised EUR 72 million and is part of an ongoing effort to list more state-owned firms on the local stock exchange. The government plans to list a 15 percent stake in gas producer Romgaz and in the Oltenia Energy Holding by year end.

The ministry said the appointment of private management to SOEs was an ongoing process. According to the daily Ziarul Financiar, eight SOEs had appointed professional managers and boards by April, including state airline Tarom and the Romanian Post.

The recruitment program is run by specialized companies under a EUR 5 million program financed by public sources, according to Mediafax newswire.

A private board of administration and CEO is currently aiming to turn Tarom around. The airline, which has been managed by private specialists for less than one year, reported a loss of EUR 53 million in 2012.

Under the management plan, approved by the board of administration, losses should reach EUR 32.2 million this year, and drop to EUR 4 million next year. The airline should become profitable in the next two years. The current CEO of Tarom is Christian Heinzmann, the former president of Luxair.

Dan Pascariu, president of Tarom’s board of administration, commented that Heinzmann had not fulfilled even 30 percent of the objectives proposed under the management program. He added that the CEO did not block hires and did not start the restructuring process of the company. The board forced Heinzmann to accept the reduction of his mandate from four years to one year. Heinzmann became CEO in October after Heinrich Vytoupil gave up the position following contractual disagreements.

Dimitris Sophocleous, the general director of CFR, the state-owned railway company, resigned this spring after his administration plan was rejected by the Ministry of Transport, shedding doubt on the outcome of the private management program currently being pursued by the government.

ovidiu.posirca@business-review.ro

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