Budget no longer needs eurobonds

Romania will not borrow from the international capital markets in the second quarter, according to Enache Jiru, state secretary with the Finance Ministry. Borrowing could theoretically be necessary in autumn, though only if necessitated by unforeseen circumstances.

What thinking underlies this announcement? The state budget does not need this avenue of funding as this year’s budget deficit target is to be adjusted from 3% to 2.1% of GDP in mid year, in accordance with the result of talks with the IMF.

Thus, after a year when borrowing from external sources was the prevailing trend, due to lower costs, the Finance Ministry might again look to the domestic market. This shift in strategy should be encouraged by the continuing downward trend of interest rates, allowing the restoration of a yield curve for two and three-year maturities.

Early in 2004, the Finance Minster announced plans for a new eurobond issue of at least 600 million euros, to take place upon the anticipated upgrading of the Standard & Poor’s sovereign rating. However, the rating upgrade did not take place, despite a positive rating outlook. In any case, now would hardly be a good time to release a bond issue on the international market, even if the Finance Ministry urgently needed the money. Yields of Romanian eurobond issues rose by no less than 0.25% last Friday. At the same time, the price margin above the benchmark level of the bonds issued by Germany rose by about 0.20%.

“Over the last few days, bond issues from emerging markets have been faced with a significant increase in yields (drops in prices), given upbeat news from the US, which has led markets to anticipate an increase in the Fed’s benchmark interest rate as early as June. This has caused many investors to sell part of the instruments issued by emerging markets, which are regarded as unjustifiably expensive under the new circumstances. These shifts have seriously affected Romanian eurobonds,” commented Radu Craciun, ABN AMRO Bank senior analyst.

The healthy position of the budget, given its prospects of remaining within a deficit level of only 2.1% of GDP, is mainly based on maintaining improvements in revenue collection, as well as on avoiding certain expenses.

The general consolidated budget ended Q1, 2004 with a 2,176bn ROL deficit, with revenues exceeding expenses in January and February. Finance Ministry data shows that the 6,280bn ROL excess of local budgets was not enough to offset the state budget deficit (5,930.2bn ROL), the social security budget deficit (1.408.8bn ROL) and the 7,067.4bn ROL expenses related to the payments of loans taken out by various ministries.
razvan.voican@zf.ro