Jeffrey Franks: Romania is in excellent shape

     From a macroeconomic point of view, Romania is in excellent shape, considers Jeffrey Franks, the head of the IMF mission in Romania. On the other hand, when it comes to structural reforms, things aren't going so well, as we need to push for reform more enthusiastically, he said in an interview.
     Jeffrey Franks expects an economic growth of 1.5-2%, above the European average, for the economy of Romania, which takes a recession in the Eurozone into account.
     The professionalization of the management of state owned companies is intended to eliminate the influence of the politicians, by making changes in the government, according to him.
     The arrears have been substantially reduced at the level of the central authorities, and moderately at the local level, but they still remain very high in the state owned companies, the head of the IMF mission to Romania said. Their elimination can be done several ways, each of them affecting the revenues from the sale of stakes in these companies.

       Reporter: Do you consider that the potential early elections could affect the schedule for the implementation of the reform measures by the government?
     Jeffrey Franks: I do not expect any radical changes. There can however be changes in the deadlines for their implementations, because the elections can postpone these deadlines. It is not, however, a significant matter, because elections have to occur in democratic countries and we need to take this aspect into consideration.
     Reporter: What is your view on the progress that Romania has achieved since your last visit?
     Jeffrey Franks: In terms of fiscal and monetary policy, the country is in an excellent shape. The targets have been met, inflation is low, and this year's budget seems to be on the right track. Last year's economic growth exceeded expectations, and this year's drop will be low, but it will be higher than the European average. So, in the macroeconomic area, we have very good news.
     When it comes to the structural aspects, on the other hand, the news is mixed. There has been progress made in some areas, whereas in others, reform is stagnating, and it needs to be pushed more enthusiastically.
     Reporter: What are the areas where reform is late?
     Jeffrey Franks: If we look at the initial schedule for the privatization schedule of minority or majority stakes owned by the state, things haven't moved as fast as they should have. This also applies to the regulatory framework in the energy sector, as well as the restructuring of the state owned companies.
     In the healthcare sector individual measures to improve its activity have been passed, but the comprehensive reforms are moving slower than anticipated. We have agreed with the Government on the fact that it needs more time to prepare and submit the draft reform for debate, in order to obtain the support of the public.
     Reporter: How can the change of the government's structure affect the process for the privatization of state owned companies, given the fact that the structure of their management or of their supervisory boards includes many state dignitaries?
     Jeffrey Franks: One of the requested reforms concerns improving the professionalism of the management of state owned companies. We need to replace people who have been appointed based on political criteria with people who are well trained and can pursue the best interest of the public in these companies. The new law of corporate governance drafted by the Ministry of Justice intends to improve the way these companies are managed. We support that law, but we need to take into account the fact that it will take a while until it starts yielding visible results.
     Reporter: Would making the management of the state owned companies more professional make political changes irrelevant for them?
     Jeffrey Franks: That is the end goal. State owned companies should be managed responsibly and profitably regardless of the political party that is in power. There should be no changes in their management when a new party wins the elections.
     Reporter: How would Romania be affected in the event of a possible bankruptcy of Greece and by a potential recession in the Eurozone, given the fact that one of the engines behind Romania's economic growth last year were exports, and the Eurozone is this country's main exports?
     Jeffrey Franks: I do not wish to speculate on a potential default. But I do want to emphasize that we, the people of the IMF, are already predicting a recession in the Eurozone. In my opinion, it has already begun. Therefore, our estimates for this year's economic growth, of 1.5-2%, are taking into account the difficult situation in Europe. In the event of a major crisis, that growth could be even lower. There are indeed risks, and that is why we wish to create buffer areas, at the level of the Government, of the NBR, of the financial sector, for Romania to be as prepared as it can be against such shocks.
     Reporter: How ready is the Romanian banking sector to handle major foreign shocks?
     Jeffrey Franks: The Romanian banking sector has several advantages. It has a high level of capitalization, above the minimum capital requirements. It has a high liquidity. The third benefit consists of the existence of a strong regulatory authority, the BNR.
     On the other hand, non-performing loans are at a high level, affecting the profitability of the sector. Moreover, there are banks in other European states that may be vulnerable (ed. note: the situation on the continental level) and that is why it is important for your country to have strong buffer areas, so you can handle the shocks.
     Reporter: How will the banking sector in Romania feel the effects of any potential major turmoil in Greece, given the exposure that their banks have to Romania?
     Jeffrey Franks: In the event of a crisis of the financial sector on a European level, Romania would be affected, given the fact that the majority of Romanian banks are owned by banks based in other European countries. But the more liquidity you have, the easier you can withstand these shocks. We need to take into account the fact that Romania is an attractive place for banks. The rate of penetration of financial and banking services is low compared to other countries. Also, it is a country where traditionally, banks were able to obtain remarkable profits, even though over the past few years the banking profit did not post any profit. The banks do however have long term strategies, and the long term outlook for Romania is good. I therefore consider that the parent banks will do everything in their power to protect the value of their investments in Romania.
     Reporter: Do you feel that there is room for an increase in wages and pensions this year?
     Jeffrey Franks: In our opinion, it is too early to issue a verdict on that matter. It is premature to speculate whether there will be money for the potential increases or not, given that it is only February and we only have partial financial data for the month of January. We need to wait for a few months to see if there is room in the budget for this kind of measures.
     Reporter: The European Commission has expressed concerns over the National Program For the Development of Infrastructure (PNDI), because it is somewhat outside the draft budget. What is your opinion on this aspect? Is there a risk to end up not having complete infrastructure projects?
     Jeffrey Franks: That is definitely a risk that we want to avoid. We have no objections on the quality of the projects included in the PNDI. As far as we know, they concern extremely reasonable aspects, such as roads, sewer and water supply systems.
     But in our opinion, the investment projects need to be included in the budget and prioritized with the other projects of a similar nature, and the money needed should come from there. Do not create a program that is outside the budget! Our issue with the PNDI does not concern the projects that the authorities want to spend money on, but rather the way the program is conceived.
     Reporter: How far has the government come when it comes to the inclusion of the PNDI in the budget?
     Jeffrey Franks: For the year 2012, we have agreed that we should include it in the IMF target, so we can prevent it from getting out of control. We have also requested that the government set a target for it, for next year. But, in the long run, the solution would not be to set a separate target, but rather its inclusion in the budget, so it can be together with the other expenses, and the government is able to prioritize.
     Reporter: As for the capping of new loans by the subsidiaries of Austrian banks in Eastern and Central Europe, you spoke about, together with the representatives of the European Commission and of the World Bank, about the importance of measures that would be the result of cooperation between all the parties involved. As you know, in the beginning, the decision of the National Bank of Austria was made unilaterally, which caused reactions among the authorities of the ECE countries. What is your opinion on the subsequent evolution of the events?
     Jeffrey Franks: The National Bank of Austria had a meeting with the representatives of the oversight institutions of the countries concerned by these measures, which the NBR also attended. Following these discussions, the Austrian authorities made several changes to the legislative draft, which means that they are listening and that they are willing to make adjustments. The second change came as a result of a regional meeting for a new "Vienna" initiative, in order to discuss the financial disintermediation process, without affecting the emerging economies of Europe. This shows that there a negotiation and consultation process is taking place, which is a good thing.
     Reporter: What other progress was made in terms of arrears?
     Jeffrey Franks: At the government level, the situation is rather good. The arrears are very low, as they have been almost completely eliminated. Significant progress has also been made at the level of the social security system, because the Government has offered them additional funds to pay off their debts before they turn into arrears, as well as some of their arrears. So on a government level, things are OK. On the local authority level, we have a new legislation of public finances which is intended to keep arrears under control. It is a measure which had a relative success, given the fact that arrears are not rising anymore, but they are not decreasing as fast as we would want them to.
     On the other hand, when it comes to the state owned companies, there is still a lot to do. In their case we have huge arrears, which the government has partially reduced. But they do remain very high and they require huge efforts to be reduced.
     Reporter: Isn't there a risk that these arrears would make state owned companies less attractive to the state owned companies, starting with the moment that they will get listed on the Bucharest Stock Exchange (BSE)?
     Jeffrey Franks: Definitely. There are several ways to solve the arrears problem. The government can pay them and then take the companies public, and get a higher price than it would get if the arrears weren't paid. Another method would be to use the proceeds of the sale to pay off the arrears, which means that buyers would receive stakes in a company with no arrears. Or the company could be sold with the arrears it has, leaving it to the new owners to pay them off. However, in this case the government would get a lower price, in line with the value of the arrears. We are working with the government to find a solution to eliminate the arrears in order to make these companies more attractive for privatization.
     Reporter: This alternative seems to be the least favorable, given the fact that, even though it still involves the costs of paying off the arrears, it also means taking the risk of getting less than the wanted price.
     Jeffrey Franks: Of course. Or perhaps nobody will want to buy certain companies because the arrears are very high.
     Reporter: Thank you! 

     *  Reuters analysts: The harsh approach of the IMF could be disastrous for Romania
     The harsh approach of the IMF could be disastrous for Romania, according to an article published by two analysts on the agency's blog, who comment that the "excessive rigor" pushed by the IMF could cause damage in the long run. The draconian conditions of the IMF have led to a 25% cut in the public sector, far more than anywhere else.
     PM Emil Boc resigned, and "anti-reform forces have been emboldened", meaning that excessive IMF rigor could do lasting harm, the article's authors, Martin Hutchinson and Christopher Swann warn, who expressed their personal opinion.
     The fund has been trying to soften its bullying reputation. Managing Director Christine Lagarde has argued that the IMF should be less harsh, admitting that "consolidating too quickly can hurt the recovery and worsen job prospects".
     Unfortunately, in its treatment of Romania the IMF lived up to its "blood-sucking" reputation. The lender's demands included 100,000 job cuts, as well as steep cuts in salaries and a hefty rise in VAT, which hits the poor directly.
     Such harsh measures may actually have the opposite effect. By strengthening anti-reform political forces, the IMF may end up pushing Romania away from the policies it encourages, the authors warn.
     Romania obviously could do without extreme measures. While its current account deficit reached 14.5 percent of GDP in 2007 (less than Latvia, Bulgaria and Estonia), it has mitigated the problem with a 30 percent devaluation of the leu between 2007 and 2009. Its public spending at 36 percent of GDP is not excessive, the two analysts note.
     Fiscal austerity, on the other hand, does nothing to solve the issue of endemic corruption, and other structural problems, which keep the per capita GDP the second lowest in the EU.
     The IMF could help the country deal with the legacy of the Ceausescu regime. Instead, its exaggerated harshness risks undermining Romania's fragile democracy - street protests helped bring the government down.
      Romania's brutal treatment spurs concerns that the IMF operates with a double standard. Richer nations such as Ireland and Portugal were offered more lenient terms. Ireland was asked only to cut the pay of incoming civil servants by 10 percent and trim the government payroll by 8,000 while Portugal got away with 5 percent salary cuts and staff reductions through attrition.
      When the IMF lent to richer countries, its conditions have softened. For the fund to succeed in its mission it may need to give its more impoverished clients similar treatment, the authors of the article concluded.
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     The economic growth exceeded expectations last year, and it is going to be lower this year, but it will nevertheless be higher than the European average.
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     We have agreed with the Government on the fact that it needs more time to prepare and submit the draft reform for debate, in order to obtain the support of the public.
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     State owned companies should be managed responsibly and profitably regardless of the political party that is in power.
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     We need to take into account the fact that Romania is an attractive place for banks.
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     Our issue with the PNDI does not concern the projects that the authorities want to spend money on, but rather the way the program is conceived.
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     When it comes to the state owned companies, arrears remain very high and they require huge efforts to be eliminated, according to Jeffrey Franks.
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     We are working with the government to find a solution to eliminate the arrears in order to make these companies more attractive for privatization.