Risks - Identification, management and mitigation strategies Ioana Burla, General Director - Budget Department Ministry of Public Finance ROMANIA JUNE 2016 Ljubljana, Slovenia

FISCAL TRANSPARENCY EVALUATION FOR ROMANIA INTERNATIONAL MONETARY FUND OCTOBER 2014 Risks - Identification, management and mitigation strategies Macroeconomic Risks (Basic) Specific Fiscal Risks (Basic) Comparability of Fiscal Data (Not met)Comparability of Fiscal Data Analysis of Fiscal Risks Budgetary contingencies (Basic) Tax expenditure(Not Met)Tax expenditure Asset and liability management (Basic)Asset and liability management Guarantees (Good) Public-private partnerships (Not Assessed) Exposure to the financial sector (Not met) Natural Resources (Not Met) Environmental risks (Not Met)Environmental risks Management of Fiscal Risk Sub-national governments (Advanced) Public corporations (Basic)Public corporations Fiscal Coordination 2

Risks - Identification, management and mitigation strategies In 2016, the analysis for fiscal policy are in: (i) Convergence Program 2016 –2019 link: (ii) Fiscal and Budgetary Strategy for 2016 –2018 link: (iii) Report on the Macroeconomic Situation of 2016 and Forecasts for the Years 2017–2019 link: 3

Convergence Program 2016–2019 –extras In the Fiscal Sustainability Report 2015, European Commission, for Romania no significant risks of fiscal stress arise in the short-term, but high risks appear in the medium term. Medium-level risks emerge from the analysis of the sustainability gap indicator S1, due mainly to the unfavorable initial budgetary position and partly to the projected age-related public spending. Long-Term Fiscal Sustainability The estimates of the pension model indicate an increase of pension expenditures share under Pillar 1, from 8.2% of GDP in 2013 to around 8.4% of GDP at the beginning of the decade, followed by a gradual decrease towards the end of the forecasting interval, until below the share of the baseline year. The Pension Pillar 2 will have an increasingly substantial share in the total pension expenditures, and is expected to amount to around 0.8% of GDP at the end of the forecasting interval. Source: National Prognosis Commission 4 Long term forecast of pension expenditures

Tax expenditure Tax expenditure – mandatory publication of data - legal basis: art.32 of Fiscal Responsibility Law: „The report that accompanies the state budget law includes detailed information regarding the impact of tax expenditures on the budgetary revenues.” For estimating the tax expenditures, Romania uses the "lost income” method Under the circumstances, the tax expenditures were projected at 27,479 million lei (3.9% of GDP) in 2015, and are expected to trend slightly up in VAT-related expenditures have the highest share in the total tax expenditures. Report on the Macroeconomic Situation of 2016 and Forecasts for the Years 2017– extras GDP (million lei)704,500746,600795,300848,700 Tax expenditures* (in million lei) (% of GDP) 27,452 (3.9) 30,262 (4.1) 30,578 (3.8) 31,970 (3.8) of which: Corporate Income Tax (million lei) (% of GDP) 936 (0.13) 997 (0.13) 841 (0.11) 794 (0.09) Tax on microbusinesses income (% of GDP)0 351 (0.05) 361 (0.05) 370 (0.04) Personal Income Tax (million lei) (% of GDP) 8,653 (1.23) 9,605 (1.29) 9,968 (1.25) 10,251 (1.21) Value-Added Tax (million lei) (% of GDP) 10,069 (1.43) 10,334 (1.38) 10,093 (1.27) 10,879 (1.28) Excise duties (% of GDP)0 41 (0.01) 43 (0.01) 46 (0.01) Social Contributions (million lei) (% of GDP) 4,437 (0.63) 5,572 (0.75) 5,819 (0.73) 6,092 (0.72) Local Taxes and Charges (million lei) (% of GDP) 3,357 (0.48) 3,362 (0.45) 3,452 (0.43) 3,539 (0.42) 5

YearThe damage's amount - thousand lei - - % of GDP ,975, , , ,600, ,736, , , * 279, Report on the Macroeconomic Situation of 2016 and Forecasts for the Years 2017– extras Environmental risks The amount of damages caused by natural disasters in * only expenditures with snow removal and floods in April

Sensitivity analysis of public debt [1] is having regard to: [1] 1) the influence of economic growth, the domestic currency depreciation and fiscal slippages on the government debt; and 2) the impact of domestic currency depreciation and interest rates changes on interest payments. Factors which impact the government debt Source: Ministry of Public Finance [1] [1] All indicators used in this sub-chapter are consistent with the EU methodology. Convergence Program 2016–2019 -extras Asset and liability management 7

Guidelines used for government borrowing in 2016 – 2018: 1.The net financing in local currency is to be favored as a move to further facilitate the development of the domestic market of government securities and help mitigate foreign currency exposure, at the same time considering the market absorption capacity and, in general, the demand for debt instruments denominated in lei. 2.Pursue a smooth redemption profile, avoiding to the extent possible the concentration of principal repayments/refinancing of government securities in the short-term. 3.Mitigate the refinancing risk and the liquidity risk by maintaining a foreign currency buffer and possibly other instruments depending on the terms and conditions thereof. 4.Maintain a presence on the international capital markets, through issuances of Eurobonds mainly in EUR and access the USD market or other foreign currency markets on an opportunistic basis, giving consideration to the extension of the debt portfolio average maturity and taking into account the cost/risk ratio associated thereto and the diversification of the investment base. 5.In the process of external financing, the debt will be contracted mainly in EUR. 6.The issuances denominated in Euro on the domestic market can be considered only under the circumstances of reimbursement/refinancing of similar instruments issued on the domestic market, which is, if there is a liquidity surplus in Euro on the domestic market, a very high demand and very favorable costs. 7.Maintain the exposure to interest rate risk under control by monitoring the share of domestic debt refixing within the next year and the average time to refix for the total portfolio. 8.Use financing instruments offered by the international financial institutions to benefit of the favorable terms and conditions attached to those instruments. Source: Government Public Debt Management Strategy 2016 – Ministry of Public Finance * Average time to maturity Exposure to risk Indicator Indicative targets for 2016 – 2018 Currency riskShare of domestic currency debt in total debt (% of total) Share of EUR denominated debt in total foreign currency denominated debt (% of total) 40% (minimum) – 60% 80% (minimum) – 95 % Refinancing riskDebt maturing in 1 year (% of total) Local currency debt maturing in 1 year (% of total) ATM* for total debt (years) ATM*for local currency debt (years) 15% - 25% (maximum) 20% - 30% (maximum) 5.5 years (minimum) – 7.0 years 3.0 years (minimum) – 5.0 years Interest rate riskDebt re-fixing in 1 year (% of total) Local currency debt re-fixing in 1 year (% of total) Average time to re-fixing for the total debt (years) Average time to re-fixing for the debt in domestic currency (years) 15% - 25% (maximum) 20% - 30% (maximum) 5.0 years (minimum) – 6.5 years 3 years (minimum) – 5 years KEY RISK INDICATORS 8

Asset and liability management The fiscal Responsibility Law introduced limits on government debt, calculated according to the methodology of the European Union. In case of Public Debt/GDP is: 45% to 50%, Ministry of Public Finance presents a report on the evidence the government growth and proposals to maintain this indicator at a sustainable level; 50% to 55%, the Government initiate and adopt a program by law with measures to reduce the share of this indicator in GDP, including the freeze in remuneration in the public sector; 55% to 60%, additionally to the measures above, the Government will freeze the total expenditure on social assistance expenditure in the public sector; Above 60%, the Government adopts the excessive deficit procedure annexed to the Treaties of the European Union, and the public debt will be reduced by an average of 5% per year. 9

Public corporations Risks associated to the state-owned companies sector:  Total assets of SOEs amounted to billion lei, accounting for 26.2% of GDP. Of these, the assets of companies subordinated to the central government totaled billion lei, accounting for 21.9% of GDP, and the assets of companies subordinated to local governments amounted to billion lei, accounting for 4.3% of GDP.  Total liabilities of the state-owned companies, i.e billion lei, accounted for 26.2% of GDP. Of these, total debts (amounts that must be paid within one year and more than one year) of public companies amounted to a total of billion lei, i.e. 8.5% of GDP, of which the total debts of companies subordinated to the central government were billion lei, accounting for 6.3% of GDP, and the total debts of companies subordinated to local governments amounted to billion lei, i.e. 2.2% of GDP.  Of the total debt, the arrears of public companies amounted to billion lei, which is 3.9% of GDP. Of these, the arrears of companies subordinated to the central government amounted to billion lei (2.6% of GDP) and the arrears of companies subordinated to local government amounted to 8.38 billion lei (1.3% of GDP).  The SOEs indebtedness calculated according to the formula (Total Debts/Total Assets was 32.36%, of which 28.79% for the public companies subordinated to the central government and 50.45% for the public companies subordinated to the local governments.  In 2014, the public companies ran a loss of 7.32 billion lei, accounting for 1.1% of GDP, with the profit of public companies amounting to 3.22 billion lei, i.e. 0.48% of GDP. The Fiscal Budgetary Strategy – extras Liabilities of and assets of government controlled entities classified outside general government are published, link: 10

Thank you! 11