Romania’s unusual bank tax risks curtailing central bank independence, says European credit rating agency

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Romania’s central bank has a vital role to play in using its independence to protect the domestic economy from uncertainty created by the government’s unorthodox new bank tax, says Scope Ratings.

The Social Democrat government’s new levy on the balance sheet of banks active in Romania comes into play when money market rates exceed 2%. Interbank rates typically reflect changes in the central bank’s short-term lending rates, which are a main tool of monetary policy. With rates currently at 3%, this could result in revenues of Ron 5.3bn (Eur 1.1bn), equal to more than 90% of domestic banks’ profits in 2018.

Scope says special taxes on banks aren’t exceptional in the EU, as the cases of Poland, Slovakia and Hungary illustrate. What is unusual is to tie a tax to money market interest rates.

This creates the impression that the government is seeking to influence monetary policy through the backdoor by penalising banks when the central bank raises interest rates, which it is under pressure to do given Bucharest’s expansionary fiscal policy and inflationary pressure,” says Bernhard Bartels, analyst at Scope.

Romania (BBB-/Negative Outlook) has been one of the fastest growing economies in the EU, with real annual GDP growth averaging 4.8% over the past four years. Still, Scope downgraded Romania to BBB- and kept the outlook at Negative given its pro-cyclical fiscal policy and ongoing concerns on political uncertainty following recent policy decisions.

The emergency decree that the government used to introduce the tax in December has troubled Romania’s banking sector, including foreign-owned banks which have to pay the levy. The move triggered sharp share-price declines on the local stock market and triggered official complaints from the ECB and two international lenders, the European Bank for Reconstruction and Development and the World Bank’s private-sector arm, the International Finance Corporation.

The central bank’s independent status still protects the country from further pressure by financial markets though higher interest rates would create extra risks to near-term financial stability,” says Bartels. “Until now, the central bank has ignored government calls for looser monetary policy.”

The National Bank of Romania raised rates three times in 2018, with the policy rate now at 2.5%, 75 bp higher than in 2017. In its monthly report, the central bank anticipates inflation to come down to 3 percent at year-end 2019 from 4.6 percent in 2018.

The government has compromised the central bank’s ability to tackle rising inflation expectations, though the good news is that the central bank has now consulted the government to discuss a disentangling of the tax from money market rates,” says Bartels.

The discussion will be part of an extraordinary meeting of the National Committee for Macroprudential Supervision scheduled for this month.

The controversy over the bank tax comes at a politically delicate time for Romania. The country holds the revolving presidency of the EU. There are elections for the European Parliament in May while the country’s next presidential elections are scheduled for the end of the year.

Scope’s next regular calendar review on Romania’s sovereign ratings is scheduled for March 15, 2019.

Scope’s recent rating action on Romania is available here.

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