Banking and energy stocks on the Bucharest exchange were worst hit on December 19, as stocks took a hammering when the government announced new plans to tax banks and energy companies, aimed at boosting revenues to rein in the budget deficit. 

On the same day, lawmakers delivered additional blows to markets, approving a controversial law on the pension system, and three bills introducing tighter regulations for local banks. 

On December 19, Finance Minister Eugen Teodorovici confirmed an imminent tax on banking assets, hinting at the same time that the second pillar of the pension system might be dismantled. Later in the day, the finance ministry published a draft emergency decree including a multitude of initiatives with major economic impact, among them a so-called “tax on greed” targeting banks. 

The 58-page bill also sets a maximum price for natural gas producers to charge to households, and introduces a 3% turnover tax for energy and telecoms companies. 

In total, the government aims to raise an additional RON10bn (€2.1bn) with the new measures. Economists have been warning that the government faces a budget shortfall following a series of populist tax cuts and wage increases for public sector workers introduced since the December 2016 general election. 

The announcement of the bill follows swiftly on a speech delivered by Liviu Dragnea, leader of the ruling Social Democratic Party (PSD) over the weekend, in which he slammed multinationals for failing to pay taxes in Romania, and told the government to tackle the “banking greed and the ROBOR evolution.”

“Following in Hungary's footsteps - at this stage Romania's fundamental story looks much weaker though,” commented Tim Ash, senior sovereign strategist at Blue-Bay Asset Management. 

The draft is subject to public debates for 10 calendar days, most of which are days off in the public sector. Most of the provisions in the bill are effective from January 1, 2019.

Market plunges

The main index of the Bucharest Stock Exchange, the BET index, plunged by more than 11% on December 19, after details surfaced about the supplementary corporate taxes.

Banks’ shares saw the deepest plunges, falling nearly 20% in the case of locally-owned Banca Transilvania and 17% for BRD-SocGen. The so-called “tax on greed”, more precisely a tax on assets that rises with the inter-bank interest rates, will cost Romanian banks some 50% of their profits, Morgan Stanley analysts quoted by Economica.net estimated.

Energy shares lost significant ground as well, with OMV Petrom diving by nearly 13% and Romgaz falling by 9% as the sector was among those to be targeted by the corporate tax bill.

The bearish mood is expected to continue on December 20 as the provisions of the draft bill are priced in.

The Bucharest Stock Exchange expressed concern about the developments in a statement. "The local capital market, which includes Romanian companies that account for more than 10% of Romania's Gross Domestic Product, has entered an area that may endanger prospects for future development, including a possible promotion to the status of Emerging Market," it said. 

"The investors are paying special attention to the actions of policy makers that influence the economic environment and the evolution of listed companies, a major aspect of the investment process being given by predictability and legislative stability."

“Threat" to the economy

Romania’s President Klaus Iohannis, who is locked in a lengthy political battle with the PSD-led government, described the developments as “a very serious and very worrying matter”. 

“This emergency ordinance was not discussed with partners … This project does not have a substantive analysis. This project comes with unheard-of ideas so far. This project threatens the economy!” the president said, according to a statement from the presidency. 

As well as the new tax on energy companies, Iohannis said the presidency had “received assurances from telecoms that this issue will also affect them”, and talked of an increase in prices for consumers. “This is just the beginning, because all companies also use energy, and fuel, obviously, and telecommunications, so, in short, we expect all to be expensive,” he claimed. 

Employers associations also slammed the proposals. The American Chamber of Commerce (AmCham) in Romania appealed to the government to "Stop the assault on the economy!” “We consider that the proposed measures as well as their adoption manner to be irresponsible and reckless, throwing the market into a complete chaos, as confirmed by the first responses on the capital markets which indicate a steep erosion of investors’ confidence within hours from the announcement,” its statement said. 

Romanian property restitution fund Fondul Proprietatea also talked of the “dire consequences” of the proposed measures, in a statement emailed to bne IntelliNews. It claims the 3% tax on energy companies’ turnover risks leading to insolvencies, while capping gas prices at RON68 per MWh “blatantly contradicts already approved Romanian legislation, as well as Romania’s obligations as European Union member state”. 

“If adopted, the proposed measures will have significant negative effects that will cascade over the entire Romanian economy, will jeopardise future growth and will isolate Romania from the international business environment,” said Johan Meyer, CEO of Franklin Templeton Investments Limited and portfolio manager of Fondul Proprietatea.  

“Moreover, many of the proposed measures will be borne by end consumers, due to increased energy prices and costs of credit. For measures that have so far-reaching effects, the predictability and transparency of the legislative process is vital, as well as considering very carefully their financial and economic impact. We are practically sitting on a ticking bomb and we urge the Government to defuse it urgently by withdrawing the draft of [Government Emergency Ordinance].”

Banking laws passed 

The banks’ shares were separately hit by the December 19 parliament vote on a package of laws that restrict the value of the loan interest rate, restrict banks’ rights in relation to their customers in default and allow recipients of leasing contracts to terminate the agreements with no financial fine. 

Under the first law endorsed by lawmakers, loan interest rates are capped. Thus, the banks will be allowed to charge interest rates for mortgage loans at a value of at most the monetary policy interest rate plus 3 percentage points. The maximum interest rate for consumer loans was set at 50% for loans of up to the equivalent of €3,000 and 18% for the larger loans. The provisions do not apply to outstanding loans at the moment the law is enforced, except when unpredictable situations result in abnormally constrictive conditions for the debtor.

A second law regulates the regime for non-performing loans (NPLs): the buyer of such loans can only request from the debtor at most twice as much as it paid to the initial creditor (this is relevant for consumer loans sold by banks at deep discounts of up to 95%). Furthermore, the debtor is entitled to pay double the market price of the NPL to the new owner of the receivable, after which they are not required to make any further payment.

Under the third law, the power of creditors is weakened as they have to ask for a court’s endorsement enforce their claims. Separately, claims including penalties and interest cannot exceed the principal of the debt at the time of the default by more than 50%.

Pensions overhaul 

On top of this the Chamber of Deputies also passed a controversial pension law on December 19, with 193 votes for, one against and 14 abstentions. The law is expected to cost 6.6% of GDP in 2022 when fully enforced.

The ruling coalition, made up of the PSD and the Alliance of Liberals and Democrats (Alde), which no longer holds a majority in the Chamber of Deputies, received support from the Democratic Alliance of Hungarians in Romania (UDMR) after accepting some amendments.

The main opposition parties, namely the National Liberal Party (PNL) and Save Romania Union (USR) will challenge the law for breaching the Constitution, USR president Dan Barna announced. Barna accused the PSD-ALDE coalition of selling false illusions to pensioners, but he did not specify exactly on what grounds the opposition will challenge the law.

One possibility is questioning the preliminary impact on the public budget, which any law must include in the documents sent to lawmakers along with the text of the bill.