Europaudvalget 2016
KOM (2016) 0374
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EUROPEAN
COMMISSION
Brussels, 7.6.2016
SWD(2016) 191 final
COMMISSION STAFF WORKING DOCUMENT
Convergence Report 2016
Accompanying the document
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND
THE COUNCIL
CONVERGENCE REPORT 2016
(prepared in accordance with Article 140(1) of the Treaty on the Functioning of the
European Union)
{COM(2016) 374 final}
EN
EN
 kom (2016) 0374 - Ingen titel
European Commission
Directorate-General for Economic and Financial Affairs
Convergence Report 2016
EUROPEAN ECONOMY
4/2016
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ABBREVIATIONS
Member States
BG
CZ
HR
HU
PL
RO
SE
EA
EA-19
EA-18
EA-17
EU-28
EU-27
EU-25
EU-15
Bulgaria
Czech Republic
Croatia
Hungary
Poland
Romania
Sweden
Euro area
Euro area, 19 Member States
Euro area, 18 Member States before 2015
Euro area, 17 Member States before 2014
European Union, 28 Member States
European Union, 27 Member States before July 2013 (i.e. EU-28 excl. HR)
European Union, 25 Member States before 2007 (i.e. EU-27 excl. BG and RO)
European Union, 15 Member States before 2004
Currencies
EUR
BGN
CHF
CZK
HRK
HUF
PLN
RON
SEK
Euro
Bulgarian lev
Swiss franc
Czech koruna
Croatian kuna
Hungarian forint
Polish zloty
Romanian leu (ROL until 30 June 2005)
Swedish krona
Central Banks
BNB
ČNB
HNB
MNB
NBP
BNR
Bulgarska narodna banka (Bulgarian National Bank – central bank of Bulgaria)
Česká národní banka (Czech National Bank – central bank of the Czech Republic)
Hrvatska narodna banka (Croatian National Bank – central bank of Croatia)
Magyar Nemzeti Bank (Hungarian National Bank – central bank of Hungary)
Narodowy Bank Polski (National Bank of Poland – central bank of Poland)
Banca Naţională a României (National Bank of Romania – central bank of Romania)
Other abbreviations
AMR
BoP
CAR
CBA
CDS
CEE
CIS
CIT
CPI
CR5
EC
ECB
EDP
Alert Mechanism Report
Balance of Payments
Capital adequacy ratio
Currency board arrangement
Credit Default Swaps
Central and Eastern Europe
Commonwealth of Independent States
Corporate Income Tax
Consumer price index
Concentration ratio (aggregated market share of five banks with the largest market share)
European Community
European Central Bank
Excessive Deficit Procedure
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EMU Economic and monetary union
ERM II Exchange rate mechanism II
ESA
European System of Accounts
ESCB European System of Central Banks
EU
European Union
Eurostat Statistical Office of the European Union
FDI
Foreign direct investment
FGS
Funding for Growth Scheme
FSA
Financial Supervisory Authority
FSAP Financial Sector Action Plan
GDP
Gross domestic product
HICP Harmonised index of consumer prices
HFSA Hungarian Financial Supervisory Authority
MFI
Monetary Financial Institution
MIP
Macroeconomic Imbalance Procedure
MTO Medium-term objective
NCBs National central banks
NEER Nominal effective exchange rate
NIK
Najwyższa Izba Kontroli (Poland's Supreme Chamber of Control)
NPL
Non-performing loans
OJ
Official Journal
OJL
Official Journal Lex
PIT
Personal Income Tax
PPS
Purchasing Power Standard
PPP
Purchasing Power Percentage
REER Real effective exchange rate
SNB
Swiss National Bank
TFEU Treaty on the Functioning of the European Union
ULC
Unit labour costs
VAT
Value added tax
WSE Warsaw Stock Exchange
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ACKNOWLEDGEMENTS
The Convergence Report and its Technical Annex were prepared in the Directorate-General for Economic
and Financial Affairs. The main contributors were Balázs Forgó, Anton Jevčák, Julda Kielytė and Erik
Sonntag.
Other contributors were Hanna Aspegren, Wojciech Balcerowicz, Laura Bardone, Francisco Barros
Castro, Eugeniu Colesnic, Karl Croonenborghs, Iván Csaba, Angela D'Elia, Patrick D'Souza, Jari Friebel,
Isabel Grilo, Zoltán Gyenes, Julien Hartley, Michal Havlát, Nora Hesse, László Jankovics, Isabelle Justo,
Csanád Sándor Kiss, Cvetan Kyulanov, Milan Lisick�½, Allen Monks, Aurora Mordonu, Kristian Orsini,
Wojciech Paczynski, Mona Papadakou, Janka Petőcz, Presiyan Petkov, Ventsislav Petrov, Lucia Piana,
Dominik Pripužić, Elena Reitano, Monika Sherwood, Outi Slotboom, Michael Stierle, Caroline
Vandierendonck, Bartlomiej Wiczewski and Rafał Wielądek.
Statistical assistance was provided by Eric Mc Coy, Gerda Symens and André Verbanck, administrative
assistance by Lina Chahrour, Greet De Pauw and Martine Meijer.
The report was coordinated by Balázs Forgó under the supervision of Paul Kutos, Head of Unit and
approved by Lucio Pench, Director, Servaas Deroose, Deputy Director General, and Marco Buti, Director
General.
Questions and comments may be referred to Balázs Forgó ([email protected]).
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CONTENTS
Convergence Report 2016
Convergence Report 2016 - Technical annex
1.
Introduction
1.1.
1.2.
ROLE OF THE REPORT
APPLICATION OF THE CRITERIA
1.2.1.
1.2.2.
1.2.3.
1.2.4.
1.2.5.
1.2.6.
Compatibility of legislation
Price stability
Public finances
Exchange rate stability
Long-term interest rates
Additional factors
1
3
5
5
5
6
7
9
12
12
13
2.
Bulgaria
2.1.
LEGAL COMPATIBILITY
2.1.1.
2.1.2.
2.1.3.
2.1.4.
2.1.5.
2.2.
2.2.1.
2.2.2.
2.2.3.
2.3.
2.3.1.
2.3.2.
2.4.
2.5.
2.6.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
15
15
15
15
16
16
16
17
17
17
17
20
20
21
22
23
23
24
25
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
2.6.1.
2.6.2.
Developments of the balance of payments
Market integration
3.
Czech Republic
3.1.
LEGAL COMPATIBILITY
3.1.1.
3.1.2.
3.1.3.
3.1.4.
3.1.5.
3.2.
3.2.1.
3.2.2.
3.2.3.
3.3.
3.3.1.
3.3.2.
3.4.
3.5.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
29
29
29
29
30
30
30
30
30
31
31
34
34
34
35
36
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
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3.6.
ADDITIONAL FACTORS
3.6.1.
3.6.2.
Developments of the balance of payments
Market integration
37
37
38
4.
Croatia
4.1.
LEGAL COMPATIBILITY
4.1.1.
4.1.2.
4.1.3.
4.1.4.
4.1.5.
4.2.
4.2.1.
4.2.2.
4.2.3.
4.3.
4.3.1.
4.3.2.
4.3.3.
4.4.
4.5.
4.6.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
The excessive deficit procedure for Croatia
Recent fiscal developments
Medium-term prospects
41
41
41
41
41
41
41
41
41
42
42
44
44
45
45
46
47
48
48
49
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
4.6.1.
4.6.2.
Developments of the balance of payments
Market integration
5.
Hungary
5.1.
LEGAL COMPATIBILITY
5.1.1.
5.1.2.
5.1.3.
5.1.4.
5.1.5.
5.2.
5.2.1.
5.2.2.
5.2.3.
5.3.
5.3.1.
5.3.2.
5.4.
5.5.
5.6.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
53
53
53
53
54
55
56
56
56
56
57
59
59
60
61
62
63
63
65
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
5.6.1.
5.6.2.
Developments of the balance of payments
Market integration
6.
Poland
6.1.
LEGAL COMPATIBILITY
6.1.1.
6.1.2.
6.1.3.
6.1.4.
6.1.5.
6.2.
6.2.1.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
67
67
67
67
68
68
68
69
69
PRICE STABILITY
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6.2.2.
6.2.3.
6.3.
6.3.1.
6.3.2.
6.4.
6.5.
6.6.
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
69
70
72
72
73
74
74
75
75
77
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
6.6.1.
6.6.2.
Developments of the balance of payments
Market integration
7.
Romania
7.1.
LEGAL COMPATIBILITY
7.1.1.
7.1.2.
7.1.3.
7.1.4.
7.1.5.
7.2.
7.2.1.
7.2.2.
7.2.3.
7.3.
7.3.1.
7.3.2.
7.4.
7.5.
7.6.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
81
81
81
81
82
83
83
83
83
84
85
87
87
88
89
90
90
91
92
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
7.6.1.
7.6.2.
Developments of the balance of payments
Market integration
8.
Sweden
8.1.
LEGAL COMPATIBILITY
8.1.1.
8.1.2.
8.1.3.
8.1.4.
8.1.5.
8.2.
8.2.1.
8.2.2.
8.2.3.
8.3.
8.3.1.
8.3.2.
8.4.
8.5.
8.6.
Introduction
Central Bank independence
Prohibition of monetary financing and privileged access
Integration in the ESCB
Assessment of compatibility
Respect of the reference value
Recent inflation developments
Underlying factors and sustainability of inflation
Recent fiscal developments
Medium-term prospects
95
95
95
95
95
96
97
97
97
97
98
100
100
101
102
103
104
104
105
PRICE STABILITY
PUBLIC FINANCES
EXCHANGE RATE STABILITY
LONG-TERM INTEREST RATES
ADDITIONAL FACTORS
8.6.1.
8.6.2.
Developments of the balance of payments
Market integration
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LIST OF TABLES
2.1.
2.2.
2.3.
2.4.
2.5.
3.1.
3.2.
3.3.
3.4.
3.5.
4.1.
4.2.
4.3.
4.4.
4.5.
5.1.
5.2.
5.3.
5.4.
5.5.
6.1.
6.2.
6.3.
6.4.
6.5.
7.1.
7.2.
7.3.
7.4.
7.5.
8.1.
8.2.
8.3.
8.4.
8.5.
Bulgaria - Components of inflation
Bulgaria - Other inflation and cost indicators
Bulgaria - Budgetary developments and projections
Bulgaria - Balance of payments
Bulgaria - Market integration
Czech Republic - Components of inflation
Czech Republic - Other inflation and cost indicators
Czech Republic - Budgetary developments and projections
Czech Republic - Balance of payments
Czech Republic - Market integration
Croatia - Components of inflation
Croatia - Other inflation and cost indicators
Croatia - Budgetary developments and projections
Croatia - Balance of payments
Croatia - Market integration
Hungary - Components of inflation
Hungary - Other inflation and cost indicators
Hungary - Budgetary developments and projections
Hungary - Balance of payments
Hungary - Market integration
Poland - Components of inflation
Poland - Other inflation and cost indicators
Poland - Budgetary developments and projections
Poland - Balance of payments
Poland - Market integration
Romania - Components of inflation
Romania - Other inflation and cost indicators
Romania - Budgetary developments and projections
Romania - Balance of payments
Romania - Market integration
Sweden - Components of inflation
Sweden - Other inflation and cost indicators
Sweden - Budgetary developments and projections
Sweden - Balance of payments
Sweden - Market integration
18
19
21
24
25
32
33
35
38
39
43
44
45
49
50
57
58
60
64
65
69
70
72
76
77
84
85
88
91
93
98
99
101
105
106
LIST OF GRAPHS
2.1.
2.2.
2.3.
2.4.
2.5.
2.6.
2.7.
2.8.
2.9.
Bulgaria - Inflation criterion since 2010
Bulgaria - HICP inflation
Bulgaria - Inflation, productivity and wage trends
Bulgaria - BGN/EUR exchange rate
Bulgaria - 3-M Sofibor spread to 3-M Euribor
Bulgaria - Long-term interest rate criterion
Bulgaria - Long-term interest rates
Bulgaria - Saving and investment
Bulgaria - Effective exchange rates
17
17
18
22
22
23
23
24
25
26
26
27
31
31
2.10. Bulgaria - Foreign ownership and concentration in the banking sector
2.11. Bulgaria - Selected banking sector soundness indicators
2.12. Bulgaria - Recent development of the financial system relative to the euro area
3.1.
3.2.
Czech Republic - Inflation criterion since 2010
Czech Republic - HICP inflation
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3.3.
3.4.
3.5.
3.6.
3.7.
3.8.
3.9.
Czech Rep. - Inflation, productivity and wage trends
Czech Republic - CZK/EUR exchange rate
Czech Republic - 3-M Pribor spread to 3-M Euribor
Czech Republic - Long-term interest rate criterion
Czech Republic - Long-term interest rates
Czech Republic - Saving and investment
Czech Republic - Effective exchange rates
32
36
36
36
37
37
38
39
40
40
42
42
43
46
47
47
47
48
48
50
50
51
56
56
58
62
62
63
63
64
64
66
66
66
69
69
71
74
74
75
75
76
77
78
78
79
83
84
86
89
90
90
90
92
92
3.10. Czech Republic - Foreign ownership and concentration in the banking sector
3.11. Czech Republic - Selected banking sector soundness indicators
3.12. Czech Republic - Recent development of the financial system relative to the euro area
4.1.
4.2.
4.3.
4.4.
4.5.
4.6.
4.7.
4.8.
4.9.
Croatia - Inflation criterion since 2010
Croatia - HICP inflation
Croatia - Inflation, productivity and wage trends
Croatia - HRK/EUR exchange rate
Croatia - 3-M Zibor spread to 3-M Euribor
Croatia - Long-term interest rate criterion
Croatia - Long-term interest rates
Croatia - Saving and investment
Croatia - Effective exchange rates
4.10. Croatia - Foreign ownership and concentration in the banking sector
4.11. Croatia - Selected banking sector soundness indicators
4.12. Croatia - Recent development of the financial system relative to the euro area
5.1.
5.2.
5.3.
5.4.
5.5.
5.6.
5.7.
5.8.
5.9.
Hungary - Inflation criterion since 2010
Hungary - HICP inflation
Hungary - Inflation, productivity and wage trends
Hungary - HUF/EUR exchange rate
Hungary - 3-M Bubor spread to 3-M Euribor
Hungary - Long-term interest rate criterion
Hungary - Long-term interest rates
Hungary - Saving and investment
Hungary - Effective exchange rates
5.10. Hungary - Foreign ownership and concentration in the banking sector
5.11. Hungary - Selected banking sector soundness indicators
5.12. Hungary - Recent development of the financial system relative to the euro area
6.1.
6.2.
6.3.
6.4.
6.5.
6.6.
6.7.
6.8.
6.9.
Poland - Inflation criterion since 2010
Poland - HICP inflation
Poland - Inflation, productivity and wage trends
Poland - PLN/EUR exchange rate
Poland - 3-M Wibor spread to 3-M Euribor
Poland - Long-term interest rate criterion
Poland - Long-term interest rates
Poland - Saving and investment
Poland - Effective exchange rates
6.10. Poland - Foreign ownership and concentration in the banking sector
6.11. Poland - Selected banking sector soundness indicators
6.12. Poland - Recent development of the financial system relative to the euro area
7.1.
7.2.
7.3.
7.4.
7.5.
7.6.
7.7.
7.8.
7.9.
Romania - Inflation criterion since 2010
Romania - HICP inflation
Romania - Inflation, productivity and wage trends
Romania - RON/EUR exchange rate
Romania - 3-M Robor spread to 3-M Euribor
Romania - Long-term interest rate criterion
Romania - Long-term interest rates
Romania - Saving and investment
Romania - Effective exchange rates
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7.10. Romania - Foreign ownership and concentration in the banking sector
7.11. Romania - Selected banking sector soundness indicators
7.12. Romania - Recent development of the financial system relative to the euro area
8.1.
8.2.
8.3.
8.4.
8.5.
8.6.
8.7.
8.8.
8.9.
Sweden - Inflation criterion since 2010
Sweden - HICP inflation
Sweden - Inflation, productivity and wage trends
Sweden - SEK/EUR exchange rate
Sweden - 3-M Stibor spread to 3-M Euribor
Sweden - Long-term interest rate criterion
Sweden - Long-term interest rates
Sweden - Saving and investment
Sweden - Effective exchange rates
93
94
94
97
97
99
102
103
103
103
104
105
106
107
107
8.10. Sweden - Foreign ownership and concentration in the banking sector
8.11. Sweden - Selected banking sector soundness indicators
8.12. Sweden - Recent development of the financial system relative to the euro area
LIST OF BOXES
1.1.
1.2.
1.3.
1.4.
1.5.
Article 140 of the Treaty
Assessment of price stability and the reference value
Excessive deficit procedure
Data for the interest rate convergence
The Macroeconomic Imbalance Procedure (MIP)
6
8
10
13
14
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Convergence Report 2016
Technical annex
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1.
1.1.
INTRODUCTION
ROLE OF THE REPORT
The euro was introduced on 1 January 1999 by
eleven Member States. Since then, Greece (2001),
Slovenia (2007), Cyprus and Malta (2008),
Slovakia (2009), Estonia (2011), Latvia (2014) and
Lithuania (2015) have adopted the euro.
Those Member States which are assessed as not
fulfilling the necessary conditions for the adoption
of the euro are referred to as "Member States with
a derogation". Article 140 of the Treaty lays down
provisions and procedures for examining the
situation of Member States with a derogation (Box
1.1). At least once every two years, or at the
request of a Member State with a derogation, the
Commission and the European Central Bank
(ECB) prepare Convergence Reports for such
Member States. Denmark and the United Kingdom
negotiated opt-out arrangements before the
adoption of the Maastricht Treaty (
1
) and do not
participate in the third stage of EMU. Until these
Member States indicate that they wish to
participate in the third stage and adopt the euro,
they are not the subject of an assessment as to
whether they fulfil the necessary conditions.
In 2014, the Commission and the ECB adopted
their latest regular Convergence Reports (
2
).
Following the Convergence Reports and on the
basis of a proposal by the Commission, the
Council decided in July 2014 that Lithuania
fulfilled the necessary conditions for adopting the
euro as of 1 January 2015 (
3
). None of the other
Member States assessed was deemed to meet the
necessary conditions for adopting the euro.
In 2016, two years will have elapsed since the last
regular reports were prepared. Denmark and the
United Kingdom have not expressed a wish to
enter the third stage of EMU. Therefore, this
convergence assessment covers Bulgaria, the
Czech Republic, Croatia, Hungary, Poland,
(
1
) Protocol (No 16) on certain provisions relating to
Denmark, Protocol (No 15) on certain provisions relating
to the United Kingdom of Great Britain and Northern
Ireland.
(
2
) European Commission, Convergence Report 2014,
COM(2014) 326 final, 4 June 2014; European Central
Bank, Convergence Report 2014, June 2014.
(
3
) Council Decision of 23 July 2014 (OJ L 228, 31.7.2014, p.
29–32).
Romania and Sweden. This Commission Staff
Working Document is a Technical Annex to the
Convergence Report 2016 and includes a detailed
assessment of the progress with convergence.
The financial and economic crisis, along with the
euro-area sovereign debt crisis, has exposed gaps
in the economic governance system of the
Economic and Monetary Union (EMU) and
showed that its instruments need to be used more
comprehensively. With the aim of ensuring a
sustainable functioning of EMU, an overall
strengthening of economic governance in the
Union has been undertaken. Accordingly, this
Commission Staff Working Document makes
references where appropriate to procedures that
help to strengthen the assessment of each Member
States' convergence process and its sustainability.
In particular, it incorporates references to the
strengthened surveillance of macroeconomic
imbalances (see sub-section 1.2.6.).
The remainder of the first chapter presents the
methodology used for the application of the
assessment criteria. Chapters 2 to 8 examine, on a
country-by-country basis, fulfilment of the
convergence criteria and other requirements in the
order in which they appear in Article 140(1) (see
Box 1.1). The cut-off date for the statistical data
included in this Convergence Report was 18 May
2016.
1.2.
APPLICATION OF THE CRITERIA
In accordance with Article 140(1) of the Treaty,
the Convergence Reports shall examine the
compatibility of national legislation with Articles
130 and 131 of the Treaty and the Statute of the
European System of Central Banks (ESCB) and of
the European Central Bank. The reports shall also
examine the achievement of a high degree of
sustainable convergence by reference to the
fulfilment of the four convergence criteria dealing
with price stability, public finances, exchange rate
stability and long term interest rates as well as
some additional factors. The four convergence
criteria are developed further in a Protocol
annexed to the Treaty (Protocol No 13 on the
convergence criteria).
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Convergence Report 2016 - Technical annex
Chapter 1 - Introduction
Box 1.1:
Article 140 of the Treaty
"1. At least once every two years, or at the request of a Member State with a derogation, the Commission
and the European Central Bank shall report to the Council on the progress made by the Member States with
a derogation in fulfilling their obligations regarding the achievement of economic and monetary union.
These reports shall include an examination of the compatibility between the national legislation of each of
these Member States, including the statutes of its national central bank, and Articles 130 and 131 and the
Statute of the ESCB and of the ECB. The reports shall also examine the achievement of a high degree of
sustainable convergence by reference to the fulfilment by each Member State of the following criteria:
— the achievement of a high degree of price stability; this will be apparent from a rate of inflation which is
close to that of, at most, the three best performing Member States in terms of price stability,
— the sustainability of the government financial position; this will be apparent from having achieved a
government budgetary position without a deficit that is excessive as determined in accordance with Article
126(6),
— the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the
European Monetary System, for at least two years, without devaluing against the euro,
— the durability of convergence achieved by the Member State with a derogation and of its participation in
the exchange-rate mechanism being reflected in the long-term interest-rate levels.
The four criteria mentioned in this paragraph and the relevant periods over which they are to be respected
are developed further in a Protocol annexed to the Treaties. The reports of the Commission and the
European Central Bank shall also take account of the results of the integration of markets, the situation and
development of the balances of payments on current account and an examination of the development of unit
labour costs and other price indices.
2. After consulting the European Parliament and after discussion in the European Council, the Council shall,
on a proposal from the Commission, decide which Member States with a derogation fulfil the necessary
conditions on the basis of the criteria set out in paragraph 1, and abrogate the derogations of the Member
States concerned.
The Council shall act having received a recommendation of a qualified majority of those among its members
representing Member States whose currency is the euro. These members shall act within six months of the
Council receiving the Commission's proposal.
The qualified majority of the said members, as referred to in the second subparagraph, shall be defined in
accordance with Article 238(3)(a).
3. If it is decided, in accordance with the procedure set out in paragraph 2, to abrogate a derogation, the
Council shall, acting with the unanimity of the Member States whose currency is the euro and the Member
State concerned, on a proposal from the Commission and after consulting the European Central Bank,
irrevocably fix the rate at which the euro shall be substituted for the currency of the Member State
concerned, and take the other measures necessary for the introduction of the euro as the single currency in
the Member State concerned."
1.2.1. Compatibility of legislation
In accordance with Article 140(1) of the Treaty,
the legal examination includes an assessment of
compatibility between a Member State’s
legislation, including the statute of its national
central bank, and Article 130 and 131 of the
Treaty. This assessment mainly covers three areas.
First, the independence of the national central
bank and of the members of its decision-
making bodies, as laid down in Article 130,
must be assessed. This assessment covers all
issues linked to a national central bank's
institutional financial independence and to the
personal independence of the members of its
decision-making bodies.
Second, in accordance with Articles 123 and
124 of the Treaty, the compliance of the
national legislation is verified against the
prohibition of monetary financing and
privileged access. The prohibition of monetary
financing is laid down in Article 123(1) of the
Treaty, which prohibits overdraft facilities or
any other type of credit facility with the ECB
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or the central banks of Member States in favour
of Union institutions, bodies, offices or
agencies, central governments, regional, local
or other public authorities, other bodies
governed by public law, or public undertakings
of Member States; and the purchase directly
from these public sector entities by the ECB or
central banks of debt instruments. As regards
the prohibition on privileged access, the central
banks, as public authorities, may not take
measures granting privileged access by the
public sector to financial institutions if such
measures are not based on prudential
considerations.
Third, the integration of the national central
bank into the ESCB has to be examined, in
order to ensure that at the latest by the moment
of euro adoption, the objectives of the national
central bank are compatible with the objectives
of the ESCB as formulated in Article 127 of the
Treaty. The national provisions on the tasks of
the national central bank are assessed against
the relevant rules of the Treaty and the
ESCB/ECB Statute.
1.2.2. Price stability
October 1995 a framework regulation (
4
) setting
the legal basis for the establishment of a
harmonised methodology for compiling consumer
price indices in the Member States. This process
resulted in the production of the Harmonised
Indices of Consumer Prices (HICPs), which are
used for assessing the fulfilment of the price
stability criterion.
As has been the case in past convergence reports, a
Member State’s average rate of inflation is
measured by the percentage change in the
arithmetic average of the last 12 monthly indices
relative to the arithmetic average of the 12 monthly
indices of the previous period. The reference value
is calculated as the arithmetic average of the
average rate of inflation of the three 'best-
performing Member States in terms of price
stability' plus 1.5 percentage points. Accordingly,
the reference value is currently 0.7%, based on the
data of Bulgaria (-1.0%), Slovenia (-0.8%) and
Spain (-0.6%) over the 12-month period covering
May 2015-April 2016. Cyprus and Romania were
identified as outliers, as their inflation rates
deviated by a wide margin from the euro area
average reflecting country-specific economic
circumstances (see Box 1.2).
The Protocol on the convergence criteria not only
requires Member States to have achieved a high
degree of price stability but also calls for a price
performance that is sustainable. The requirement
of sustainability aims at ensuring that the degree of
price stability and inflation convergence achieved
in previous years will be maintained after adoption
of the euro. This deserves particular attention as
the financial crisis exposed unsustainable price
developments in many EU Member States,
including euro area countries, in the pre-crisis
period.
Inflation sustainability implies that the satisfactory
inflation performance must essentially be due to
the adequate behaviour of input costs and other
factors influencing price developments in a
structural manner, rather than reflecting the
influence of cyclical or temporary factors.
Therefore, this Technical Annex also takes account
of the role of the macroeconomic situation and
cyclical position in inflation performance,
The price stability criterion is defined in the first
indent of Article 140(1) of the Treaty: “the
achievement of a high degree of price stability […]
will be apparent from a rate of inflation which is
close to that of, at most, the three best performing
Member States in terms of price stability”.
Article 1 of the Protocol on the convergence
criteria further stipulates that “the criterion on
price stability […] shall mean that a Member State
has a price performance that is sustainable and an
average rate of inflation, observed over a period of
one year before the examination, that does not
exceed by more than 1.5 percentage points that of,
at most, the three best performing Member States
in terms of price stability. Inflation shall be
measured by means of the consumer price index on
a comparable basis, taking into account differences
in national definitions”.
Since national consumer price indices (CPIs)
diverge substantially in terms of concepts, methods
and practices, they do not constitute the
appropriate means to meet the Treaty requirement
that inflation must be measured on a comparable
basis. To this end, the Council adopted on 23
(
4
) Council Regulation (EC) No 2494/95 of 23 October 1995
concerning harmonised indices of consumer prices (OJ L
257, 27.10.1995, pp. 1-4), amended by Regulations (EC)
No 1882/2003 and No 596/2009 of the European
Parliament and of the Council.
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Box 1.2:
Assessment of price stability and the reference value
The numerical part of the price stability criterion implies a comparison between a Member State's average
price performance and a reference value.
A Member State’s
average rate of inflation
is measured by the percentage change in the unweighted average
of the last 12 monthly indices relative to the unweighted average of the 12 monthly indices of the previous
period, rounded to one decimal. This measure captures inflation trends over a period of one year as requested
by the provisions of the Treaty. Using the commonly used inflation rate – calculated as the percentage change
in the consumer price index of the latest month over the index for the equivalent month of the previous year –
would not meet the one year requirement. The latter measure may also vary importantly from month to month
because of exceptional factors.
The
reference value
is calculated as the unweighted average of the average rates of inflation of, at most, the
three best-performing Member States in terms of price stability plus 1.5 percentage points. The outcome is
rounded to one decimal. While in principle the reference value could also be calculated on the basis of the
price performance of only one or two best performing Member States in terms of price stability, it has been
existing practice to select the three best performers. Defining the reference value in a relative way (as
opposed to a fixed reference value) allows to take into account the effects of a common shock that affects
inflation rates across all Member States.
As Article 140(1) of the Treaty refers to 'Member States' and does not make a distinction between euro area
and other Member States, the Convergence Reports select the three best performers from all Member States –
EU-15 for the Convergence Reports before 2004, EU-25 for the reports between 2004 and 2006, EU-27 for
reports between 2007 and 2013 and EU-28 for reports since 2014.
The notion of 'best
performer in terms of price stability'
is not defined explicitly in the Treaty. It is
appropriate to interpret this notion in a non-mechanical manner, taking into account the state of the economic
environment at the time of the assessment. In previous Convergence Reports, when all Member States had a
positive rate of inflation, the group of best performers in terms of price stability naturally consisted of those
Member States which had the lowest positive average rate of inflation. In the 2004 report, Lithuania was not
taken into account in the calculation of the reference value because its negative rate of inflation, which was
due to country-specific economic circumstances, was significantly diverging from that of the other Member
States, making Lithuania a de facto outlier that could not be considered as 'best performer' in terms of price
stability. In 2010, in an environment characterised by exceptionally large common shocks (the global
economic and financial crisis and the associated sharp fall in commodity prices), a significant number of
countries faced episodes of negative inflation rates (the euro area average inflation rate in March 2010 was
only slightly positive, at 0.3%). In this context, Ireland was excluded from the best performers, i.e. the only
Member State whose average inflation rate deviated by a wide margin from that of the euro area and other
Member States, mainly due to the severe economic downturn in that country. Outliers were also identified in
2013 (Greece) and 2014 (Greece, Bulgaria and Cyprus). At the current juncture, it is warranted to identify
Cyprus and Romania as outliers, as their inflation rates deviated by a wide margin from the euro area average,
driven by country-specific factors that limit their scope to act as meaningful benchmarks for other Member
States. In case of Cyprus, deeply negative inflation mainly reflected the adjustment needs and exceptional
situation of the economy. In case of Romania, it was mainly due to large VAT reductions. In April 2016, the
12-month average inflation rate of Cyprus and Romania were respectively -1.8% and -1.3% and that of the
euro area 0.1%.
(Continued on the next page)
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Box (continued)
Table 1:
Inflation reference value in previous and current Convergence Reports
Convergence Report
adoption date
1998
2000
2002
2004
2006 May
2006 December
2007
2008
2010
2012
2013
2014
2016
January 1998
March 2000
April 2002
August 2004
March 2006
October 2006
March 2007
March 2008
March 2010
March 2012
April 2013
April 2014
April 2016
Cut-off month
Three best
performers
1) 2)
Austria, France, Ireland
Sweden, France, Austria
United Kingdom, France, Luxembourg
5)
Finland, Denmark, Sweden
Sweden, Finland, Poland
Poland, Finland, Sweden
Finland, Poland, Sweden
Malta, Netherlands, Denmark
Portugal, Estonia, Belgium
Sweden, Ireland, Slovenia
Sweden, Latvia, Ireland
Latvia, Portugal, Ireland
Bulgaria, Slovenia, Spain
Reference
value
3)
2.7
2.4
3.3
2.4
2.6
2.8
3.0
3.2
1.0
3.1
2.7
1.7
0.7
Euro area average
inflation rate
4)
1.5
1.4
2.4
2.1
2.3
2.2
2.1
2.5
0.3
2.8
2.2
1.0
0.1
1) EU15 until April 2004; EU25 between May 2004 and December 2006; EU27 between January 2007 and June 2013; EU28 from July 2013 onwards.
2) In case of equal rounded average inflation for several potential best performers, the ranking is determined on the basis of unrounded data.
3) Reference values are only computed at the time of Convergence Reports. All calculations of the reference value
between the Convergence Reports are purely illustrative.
4) Measured by the percentage change in the arthmetic average of the latest 12 monthly indices relative to the
arithmetic average of the 12 monthly indices of the previous period.
5) Based on revised data, Germany would replace Luxembourg as one of the three Member States with the lowest
12-month average inflation in April 2002. This change would not affect the price and long-term interest rate reference values in April 2002.
Sources: Eurostat and Commission services.
developments in unit labour costs as a result of
trends in labour productivity and nominal
compensation per head, developments in import
prices to assess how external price developments
have impacted on domestic inflation. Similarly, the
impact of administered prices and indirect taxes on
headline inflation is also considered.
From a forward-looking inflation perspective, the
report includes an assessment of medium-term
prospects for price developments. The analysis of
factors that have an impact on the inflation outlook
– cyclical conditions, labour market developments
and credit growth – is complemented by a
reference to the most recent Commission services'
forecast of inflation. That forecast can
subsequently be used to assess whether the
Member State is likely to meet the reference value
also in the months ahead (
5
). Medium-term
inflation prospects are also assessed by reference
to the economies' key structural characteristics,
including the functioning of the labour and product
markets.
1.2.3. Public finances
The convergence criterion dealing with the
government budgetary position is defined in the
second indent of Article 140(1) of the Treaty as
“the sustainability of the government financial
position: this will be apparent from having
achieved a government budgetary position without
a deficit that is excessive as determined in
accordance with Article 126(6)”. Furthermore,
Article 2 of the Protocol on the convergence
criteria states that this criterion means that “at the
time of the examination the Member State is not
the subject of a Council decision under Article
126(6) of the said Treaty that an excessive deficit
exists”.
The convergence assessment in the budgetary area
is thus directly linked to the excessive deficit
procedure which is specified in Article 126 of the
Treaty and further clarified in the Stability and
Growth Pact (see Box 1.3 for further information
on the excessive deficit procedure as strengthened
by the 2011 reform of the Stability and Growth
Pact). The details of the excessive deficit
procedure are defined in Regulation 1467/97 as
amended in 2005 and 2011 (under the "Six-Pack")
which sets out the way in which government
deficit and debt levels are assessed to determine
(
5
) Based on the Commission services' Spring 2016 Forecast,
the inflation reference value is forecast to stand at 1.0% in
December 2016.
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Box 1.3:
Excessive deficit procedure
The excessive deficit procedure is specified in Article 126 of the Treaty, the associated Protocol on the
excessive deficit procedure and Council Regulation (EC) No 1467/97 on speeding up and clarifying the
implementation of the excessive deficit procedure (
1
), which is the “corrective arm” of the Stability and
Growth Pact. Together, they determine the steps to be followed to reach a Council decision on the existence
and correction of an excessive deficit, which forms the basis for the assessment of compliance with the
convergence criterion on the government budgetary position. As part of an overall strengthening of
economic governance in the Union, Council Regulation (EC) No 1467/97 was amended in 2011. In
particular, a numerical benchmark was introduced for operationalising the debt criterion in Article 126(2) of
the Treaty.
Article 126(1) states that Member States shall avoid excessive government deficits. The Commission is
required to monitor the development of the budgetary situation and of the stock of government debt in the
Member States with a view to identifying gross errors (Article 126(2)). In particular, compliance with
budgetary discipline is to be examined by the Commission on the basis of the following two criteria:
whether the ratio of the planned or actual government deficit to gross domestic product exceeds a
reference value, specified in the Protocol on the EDP as 3 percent of GDP, unless:
either the ratio has declined substantially and continuously and reached a level that comes close to
the reference value;
or, alternatively, the excess over the reference value is only exceptional and temporary and the ratio
remains close to the reference value;
whether the ratio of government debt to gross domestic product exceeds a reference value, specified in
the Protocol on the EDP as 60 percent of GDP, unless the ratio is sufficiently diminishing and
approaching the reference value at a satisfactory pace.
According to the Protocol on the excessive deficit procedure, the Commission provides the statistical data
for the implementation of the procedure. As part of the application of this Protocol, Member States have to
notify data on government deficits, government debt, nominal GDP and other associated variables twice a
year, before 1 April and before 1 October (
2
). After each reporting date, Eurostat examines whether the data
are in conformity with ESA2010 (
3
) rules and related Eurostat decisions and, if they are, validates them.
The Commission is required to prepare a report if a Member State does not fulfil the requirements under one
or both of the criteria given above (Article 126(3)). The report also has to take into account whether the
government deficit exceeds government investment expenditure and all other relevant factors. These include
developments in the medium-term economic position (
4
) the medium-term budgetary position of the
Member State (
5
), in the medium-term government debt position (
6
), as well as any other factors which, in
the opinion of the Member State concerned, are relevant and which the Member State has put forward.
The Council and the Commission shall make a balanced overall assessment of all the relevant factors. Those
factors shall be taken into account in the steps leading to the decision on the existence of an excessive deficit
(
1
) OJ L 209, 2.8.1997, p. 6. Regulation as amended by Regulation (EC) No 1056/2005 (OJ L 174, 7.7.2005, p. 5).
(
2
) Council Regulation (EC) No 479/2009 on the application of the Protocol on the excessive deficit procedure (OJ L
145, 10.06.2009, p1), as amended.
(
3
) Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European
system of national and regional accounts in the European Union, OJ L 174, 26.6.2013, p 1–727).
(
4
) In particular, potential growth, including the various contributions, cyclical developments, and the private sector net
savings position.
(
5
) In particular, the record of adjustment towards the medium-term budgetary objective, the level of the primary balance
and developments in primary expenditure, the implementation of policies in the context of the prevention and
correction of excessive macroeconomic imbalances and in the context of the common growth strategy of the Union,
as well as the overall quality of public finances, in particular the effectiveness of national budgetary frameworks.
(
6
) In particular, its dynamics and sustainability, including, risk factors including the maturity structure and currency
denomination of the debt, stock-flow adjustment and its composition, accumulated reserves and other financial assets,
guarantees, in particular those linked to the financial sector, and any implicit liabilities related to ageing and private
debt, to the extent that it may represent a contingent implicit liability for the government.
(Continued on the next page)
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Box (continued)
when assessing compliance on the basis of the debt criterion. When assessing compliance on the basis of the
deficit criterion in a country with a debt ratio exceeding the reference value, those factors shall be taken into
account in the steps leading to the decision on the existence of an excessive deficit subject to the double
condition that the deficit is close to the reference value and its excess over it is temporary. Due consideration
is foreseen for pension reforms introducing a multi-pillar system including a mandatory, fully-funded pillar
and the net cost of the publicly managed pillar.
In the next step of the procedure, the Economic and Financial Committee (EFC) formulates an opinion on
the Commission report, within at most two weeks after its publication (Article 126(4), Article 3.1 of
Regulation 1467/97). If it considers that an excessive deficit exists or may occur, the Commission addresses
an opinion to the Council (Article 126(5)). Then, on the basis of a Commission proposal and after an overall
assessment, which includes any observation that the concerned Member State may have, the Council
decides, whether an excessive deficit exists (Article 126(6)).
If the Council decides that an excessive deficit exists, it has to issue without delay a recommendation to the
Member State concerned with a view to correcting the deficit within a given period (Article 126(7)).
According to Regulation 1467/97, the Council recommendation has to specify when the correction of the
excessive deficit should be completed, the annual budgetary targets that the Member State concerned has to
achieve, and has to include a maximum deadline of six months for effective action to be taken by the
Member State concerned. Within this deadline, the Member State concerned shall report to the Council on
action taken. The report shall include targets for government expenditure and revenue and for the
discretionary measures consistent with the Council's recommendation, as well as information on the
measures taken and the nature of those envisaged to achieve the targets.
If effective action has been taken in compliance with a recommendation under Article 126(7) and, compared
with the economic forecasts underlying the recommendation, unexpected adverse economic events with
major unfavourable consequences for government finances occur subsequent to its adoption, the Council
may decide, on a recommendation from the Commission, to adopt a revised recommendation under the same
article, which may notably extend the deadline for the correction of the excessive deficit. In the case of
severe economic downturn for the euro area or the EU as a whole, the Council may also decide, on
recommendation by the Commission, to adopt a revised recommendation under Article 126(7), provided that
this does not endanger fiscal sustainability in the medium term.
Where it establishes that there has been no effective action in response to its recommendations, the Council
adopts a decision under Article 126(8) on the basis of a Commission recommendation immediately after the
expiry of the deadline for taking action (or at any time thereafter when monitoring of the action taken by the
Member State indicates that action is not being implemented or is proving to be inadequate). The provisions
of Article 126(9 and 11), on enhanced Council surveillance and ultimately sanctions in case of non-
compliance, as well as the new enforcement mechanisms introduced in 2011, are not applicable to Member
States with a derogation (that is, those that have not yet adopted the euro), which is the case of the Member
State considered in this report. Following a Council decision establishing, under Article 126(8), that the
Member State did not take effective action in response to a Council recommendation under Article 126(7),
the Council, on recommendation by the Commission, addresses to Member States with a derogation a new
recommendation under Article 126(7).
When, in the view of the Council, the excessive deficit in the Member State concerned has been corrected,
the Council abrogates its decision on the existence of an excessive deficit, again on the basis of a
Commission recommendation (Article 126(12)).
More information about the EU fiscal surveillance framework could be found in the
Vade Mecum on the
Stability and Growth Pact,
European Economy Institutional Paper 021, March 2016:
http://ec.europa.eu/economy_finance/publications/eeip/pdf/ip021_en.pdf
whether an excessive deficit exists, under article
126 of TFEU. The convergence assessment in the
budgetary area is therefore judged by whether the
Member State is subject to a Council decision
under 126(6) on the existence of an excessive
deficit (
6
).
(
6
) The definitions of the government deficit and debt used in
this report are in accordance with the excessive deficit
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Long-term sustainability of public finances
deserves particular attention at a time when the
financial crisis has significantly impacted on the
fiscal positions and debt levels in many Member
States. In response to this, economic governance in
the EMU was substantially strengthened in 2011,
which included,
inter alia,
the operationalisation of
the debt criterion in the Excessive Deficit
Procedure (
7
).
1.2.4. Exchange rate stability
on the establishment of the ERM II (
9
), the
European Monetary System has been replaced by
the Exchange Rate Mechanism II upon the
introduction of the euro, and the euro has become
the centre of the mechanism.
In its assessment of the exchange rate stability
criterion, the Commission takes into account
developments in auxiliary indicators such as
foreign reserve developments and short-term
interest rates, as well as the role of policy
measures,
including
foreign
exchange
interventions, and international financial assistance
wherever relevant, in maintaining exchange rate
stability.
In principle, the assessment of this criterion
verifies the participation in ERM II and examines
exchange rate behaviour within the mechanism. As
currently none of the Member States assessed in
this Convergence Report participates in ERM II,
de facto exchange rate stability is reviewed for
analytical purposes. The relevant period for
assessing exchange rate stability in this Technical
Annex is 19 May 2014 to 18 May 2016.
1.2.5. Long-term interest rates
The Treaty refers to the exchange rate criterion in
the third indent of Article 140(1) as “the
observance of the normal fluctuation margins
provided for by the exchange-rate mechanism of
the European Monetary System, for at least two
years, without devaluing against the euro”.
Article 3 of the Protocol on the convergence
criteria stipulates: “The criterion on participation
in the exchange rate mechanism of the European
Monetary System (…) shall mean that a Member
State has respected the normal fluctuation margins
provided for by the exchange-rate mechanism of
the European Monetary System without severe
tensions for at least the last two years before the
examination. In particular, the Member State shall
not have devalued its currency’s bilateral central
rate against the euro on its own initiative for the
same period” (
8
). Based on the Council Resolution
procedure, as was the case in previous convergence reports.
These definitions are laid out in the amended Council
Regulation (EC) No 479/2009. In particular, government
debt is general government consolidated gross debt at
nominal value. Information regarding the excessive deficit
procedure and its application to different Member States
since
2002
can
be
found
at:
http://ec.europa.eu/economy_finance/economic_governanc
e/sgp/deficit/index_en.htm.
(
7
) A directive on minimum requirements for national
budgetary frameworks, two new regulations on
macroeconomic surveillance and three regulations
amending the Stability and Growth Pact and
complementing it with new enforcement mechanisms for
euro area Member States entered into force on 13
December 2011. Besides the operationalisation of the debt
criterion in the Excessive Deficit Procedure mentioned in
Box 1.3, the amendments introduced a number of
important novelties in the Stability and Growth Pact, in
particular an expenditure benchmark to complement the
assessment of progress towards the country-specific
medium-term budgetary objective.
(
8
) In assessing compliance with the exchange rate criterion,
the Commission examines whether the exchange rate has
remained close to the ERM II central rate, while reasons
for an appreciation may be taken into account, in
accordance with the Common Statement on Acceding
Countries and ERM2 by the Informal ECOFIN Council,
Athens, 5 April 2003.
The fourth indent of Article 140(1) of the Treaty
requires “the durability of convergence achieved
by the Member State with a derogation and of its
participation in the exchange rate mechanism
being reflected in the long-term interest rate
levels”. Article 4 of the Protocol on the
convergence criteria further stipulates that “the
criterion on the convergence of interest rates (…)
shall mean that, observed over a period of one year
before the examination, a Member State has had an
average nominal long-term interest rate that does
not exceed by more than two percentage points
that of, at most, the three best performing Member
States in terms of price stability. Interest rates shall
be measured on the basis of long-term government
bonds or comparable securities, taking into
account differences in national definitions” (see
Box 1.4).
For the assessment of the criterion on the
convergence of interest rates, yields on benchmark
long-term bonds have been taken, using an average
rate over the latest 12 months.
(
9
) 97/C 236/03 of 16 June 1997, OJ C 236, 2.8.1997, p.5.
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Box 1.4:
Data for the interest rate convergence
The fourth indent of Article 140(l) of the Treaty requires that the durability of nominal convergence and
exchange rate stability in Member States should be assessed by reference to long-term interest rates. Article
4 of the Protocol on the convergence criteria adds that these “Interest rates shall be measured on the basis of
long-term government bonds or comparable securities, taking into account differences in national
definitions”.
Article 5 of the Protocol requires that the Commission should provide the statistical data used for the
application of the convergence criteria. However, in the context of the interest rate criterion, the ECB has
developed the criteria for harmonising the series of yields on benchmark 10 year bonds on behalf of Eurostat
and collects the data from the central banks. The selection of bonds for inclusion in this series is based on
the following criteria:
issued by central government;
a residual maturity as close as possible to 10 years;
adequate liquidity, which is the main selection criterion; the choice between a single benchmark or the
simple average of a sample is based on this requirement;
fixed coupon;
yield gross of tax.
For sixteen Member States, the residual maturity of the benchmark bond is above 9.5 years. For eleven
Member States, the residual maturity of the benchmark bond is below 9.5 years, in particular for
Luxembourg with a residual maturity below 8 years. All yields are calculated on the basis of secondary
market rates. For the Czech Republic and Germany a basket of bonds is used, while a single benchmark
bond is used in twenty-five Member States. For Estonia, no appropriate harmonised series or proxy could be
identified, primarily reflecting the very low level of Estonian government debt.
Data used in this Report can be found on Eurostat ("Maastricht criterion bond yields (mcby): EMU
convergence criterion bond yields", code: tec00097). The same series is also published by the ECB's
Statistical Data Warehouse (code IRS.M.Country
Code.L.L40.CI.0000.Currency Code.N.Z).
The reference value for April 2016 is calculated as
the simple average of the average long-term
interest rates in Bulgaria (2.5%), Slovenia (1.8%)
and Spain (1.8%), plus 2 percentage points,
yielding a reference value of 4.0%.
1.2.6. Additional factors
the situation and development of the external
balance (
10
). Market integration is assessed through
trade, foreign direct investment and a smooth
functioning of the internal market. Finally,
progress in financial integration is examined,
together with the main characteristics, structures
and trends of the financial sector.
Starting with the 2012 Convergence Report, the
convergence assessment is aligned with the
broader European Semester approach which takes
an integrated look at the economic policy
challenges facing EMU in ensuring fiscal
sustainability, competitiveness, financial market
stability and economic growth.
The Treaty in Article 140 also calls for an
examination of other factors relevant to economic
integration and convergence. These additional
factors include financial, product and labour
market integration and the development of the
balance of payments. The examination of the
development of unit labour costs and other price
indices, which is also prescribed by Article 140 of
the Treaty, is covered in the section on price
stability.
The assessment of additional factors gives an
important indication of a Member State's ability to
integrate into the euro area without difficulties. As
regards the balance of payments, the focus is on
(
10
) The external balance is defined as the combined current
and capital account (net lending/borrowing vis-à-vis the
rest of the world). This concept permits in particular to take
full account of external transfers (including EU transfers),
which are partly recorded in the capital account. It is the
concept closest to the current account as defined when the
Maastricht Treaty was drafted.
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Chapter 1 - Introduction
Box 1.5:
The Macroeconomic Imbalance Procedure (MIP)
The Macroeconomic Imbalance Procedure (MIP): key elements
A key lesson from the economic and financial crisis has been that the economic governance framework
underpinning EMU needed to be further strengthened to address the issue of unsustainable macroeconomic
trends. The procedure on prevention and correction of macroeconomic imbalances – the Macroeconomic
Imbalance Procedure (MIP) – responds to this need and was one of the key elements of the legislative
package (the "Six-Pack") to enhance the governance structures in EMU.
The overall design of the MIP provides for preventive action and corrective action for more serious cases.
The procedure relies on a two-step approach where the first step consists of an alert mechanism that aims to
identify Member States with potentially emerging macroeconomic imbalances and which require more in-
depth investigation. If, on the basis of such an in-depth analysis (second step), the situation is considered
unproblematic no further steps are taken. If the Commission however considers that macroeconomic
imbalances exist, it may come forward with proposals for policy recommendations for the Member State
concerned (which will be – in the preventive arm – part of the integrated package of recommendations under
the European Semester). In case the in-depth review points to excessive imbalances in a Member State, the
Council could declare the existence of an excessive imbalance and adopt a recommendation asking the
Member State to present a Corrective Action Plan (CAP). Although the Commission had identified cases of
excessive imbalances, the Excessive Imbalances Procedure has never been launched, as specific monitoring
and decisive policy action has been deemed as sufficient response to these situations.
The alert mechanism scoreboard: design and rationale
The scoreboard is an element of the alert mechanism and is intended to facilitate the identification of
potential imbalances that are under the scope of the MIP and require closer examination. In line with the
different challenges facing the Member States, it comprises indicators of the external position (current
account and net international investment position), competitiveness developments (real effective exchange
rates, unit labour cost, export market shares) and indicators of internal imbalances (private sector and
general government debt, private sector credit flow, change in total financial sector liabilities, house prices
and four employment indicators). The scoreboard thus encompasses variables where both the economic
literature and recent experiences suggest associations with economic crises, while indicative alert thresholds
were identified for each indicator.
The 2016 Alert Mechanism Report (AMR) and In-Depth Reviews (IDR)
As the first step of the MIP process of 2016, the Commission published its fifth Alert Mechanism Report in
November 2015. The AMR made an economic reading of the scoreboard, based on which 18 Member States
were identified for the conduct of IDR. Five of them are Member States covered in this report (Bulgaria,
Croatia, Hungary, Romania and Sweden). The Commission concluded that Hungary and Romania do not
experience macroeconomic imbalances in the MIP sense. Sweden was found to be experiencing imbalances,
while Bulgaria and Croatia are continuing to experience excessive imbalances.
The section on additional factors makes reference
to the surveillance of macroeconomic imbalances
under the Macroeconomic Imbalance Procedure,
which was adopted in December 2011 as one of
the key elements of the legislative package (the
"Six-Pack") to enhance the governance structures
in EMU, and integrates its results into the
assessment (see Box 1.5).
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2.
2.1.
BULGARIA
LEGAL COMPATIBILITY
2.1.1. Introduction
The legal basis for the Bulgarska narodna banka
(BNB – central bank of Bulgaria), the Law on the
Bulgarian National Bank (the BNB Law) of 1997,
has been amended to some degree since the 2014
Convergence Report by repealing Article 14(2) of
the BNB Law. The 2014 Convergence Report
indicated that as regards the Governor such
provision stipulating that "where the duties of a
Governing Council member cease before the term
of office has expired, another person shall be
elected/appointed for the outstanding period of the
term of office" was not in line with Article 14.2 of
the ESCB/ECB Statute pursuant to which the term
of office of a Governor shall be no less than five
years. Further comments provided in the 2014
Convergence Report are largely repeated in this
year's assessment.
2.1.2. Central Bank independence
applicable to the BNB Governor, Deputy
Governors and the members of the BNB Managing
Board since December 2010 has to be brought in
line with Article 14.2 of the ESCB/ECB Statute.
Article 33(1) in conjunction with Article 3(13) of
the Conflict of Interest Prevention and
Ascertainment Act provides that the breach of its
provisions and the existence of a conflict of
interest are grounds for dismissal. This
incompatibility should be removed by specifying
that a dismissal of the Governor is only admissible
if, as set out in Article 14.2 of the ESCB/ECB
Statute, the breach of the duty is a lack of
fulfilment of the conditions required for the
performance of the Governor's duties or is a
serious misconduct of which the Governor has
been guilty.
Pursuant to Article 12(1) of the BNB Law, the
Governor shall be elected by the National
Assembly. The National Assembly has taken the
view that it has the power to annul or amend its
decisions, including decisions under Article 12(1)
of the BNB Law. The National Assembly has
substantiated this assertion by stating that pursuant
to a Constitutional Court decision of 26 February
1993, the Bulgarian Constitution does not
explicitly prohibit the National Assembly from
amending or annulling its decisions. Such
understanding would allow the dismissal of the
Governor under conditions other than those
mentioned in Article 14.2 of the ESCB/ECB
Statute. It should be ensured that the Governor,
when properly elected or appointed, may not be
dismissed under conditions other than those
mentioned in Article 14.2 of the ESCB/ECB
Statute.
Article 44 of the BNB Law should be amended
with a view to achieving compatibility with Article
130 of the TFEU and Article 7 of the ESCB/ECB
Statute. Pursuant to Article 44 of the BNB Law,
the members of the Governing Council, in the
performance of their tasks, shall be independent
and shall not seek or take any instructions from the
Council of Ministers or from any other body or
institution. It should be clarified that this
encompasses national, foreign and EU institutions
or bodies. In this context, it is also noted that
Article 3 of the BNB Law provides that "in the
formulation of the general outlines of the monetary
policy, the BNB and the Council of Ministers shall
Article 14(1) of the BNB Law does not accurately
mirror the grounds for dismissal of the Governor
set out exhaustively in Article 14.2 of the
ESCB/ECB Statute.
Pursuant to Article 14(1) of the BNB Law, a
member of the BNB Governing Council, including
the Governor, may be relieved from office (1) "if
he no longer fulfils the conditions required for the
performance of his duties under Article 11(4)", (2)
"if he is in practical inability to perform his duties
for more than six months" or (3) "if he has been
guilty of serious professional misconduct".
Whereas the second ground for dismissal is not
provided in Article 14.2 of the ESCB/ECB Statute,
the third dismissal ground provided in Article
14(1) of the BNB Law narrows down the concept
of "serious misconduct" of Article 14.2 of the
ESCB/ECB Statute to "serious professional
misconduct". In order to remove these
imperfections and limit interpretation problems,
Article 14(1) of the BNB Law should be amended.
Furthermore, the ground for dismissal provided in
the Conflict of Interest Prevention and
Ascertainment Act of 2008 which has been
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Convergence Report 2016 - Technical annex
Chapter 2 - Bulgaria
inform each other". This procedure provides for
the opportunity for the government to exert ex ante
influence on the monetary policy of the BNB. As
from the date of the formal adoption of the euro in
Bulgaria or after the currency board agreement has
been suspended this might constitute an
incompatibility in the area of independence, with
Article 130 of the TFEU and Article 7 of the
ESCB/ECB.
2.1.3. Prohibition of monetary financing and
privileged access
Tasks
The incompatibilities in the BNB Law are linked
to the following ESCB/ECB tasks:
• definition of monetary policy and monetary
functions, operations and instruments of the ESCB
(Articles 2(1) and (3), 16(4) and (5), 28, 30, 31, 32,
33, 35, 38, 41 and 61 of the BNB Law);
• conduct of foreign exchange operations and the
definition of foreign exchange rate policy (Articles
20(1), 28, 31, 32 of the BNB Law);
• right to authorise the issue of banknotes and the
volume of coins (Articles 2(5), 16(9), 24 to 27 of
the BNB Law);
• non-recognition of the role of the ECB in the
field of international cooperation (Articles 5,
16(12) and 37(4) of the BNB Law);
• ECB's right to impose sanctions (Article 61, 62
of the BNB Law).
There are also numerous imperfections regarding:
• non-recognition of the role of the ECB in the
functioning of the payment systems (Articles 2(4)
and 40(1) of the BNB Law);
• non-recognition of the role of the ECB and the
EU in the collection of statistics (Article 4(1) and
42 of the BNB Law);
• non-recognition of the role of the ECB and of the
Council in the appointment of the external auditor
(Articles 49(4) of the BNB Law);
• absence of an obligation to comply with the
Eurosystem's regime for the financial reporting of
NCB operations (Article 16(11), 46 and 49 of the
BNB Law).
2.1.5. Assessment of compatibility
Article 45(1) and (2) of the BNB Law are not fully
consistent with Article 123 of the TFEU and
Article 21.1 of the ESCB/ECB Statute and thus
should be amended.
Article 45(1) of the BNB Law provides that the
BNB shall not extend credits and guarantees,
including through purchase of debt instruments, to
the Council of Ministers, municipalities, as well as
to other governmental and municipal institutions,
organizations and enterprises. Article 45(1) of the
BNB Law should be amended with a view to
including all entities mentioned in Article 123(1)
of the TFEU and Article 21.1 of the ESCB/ECB
Statute. Furthermore, while the prohibition of
monetary financing does not allow the direct
purchase of public sector debt, purchases on the
secondary market are not prohibited unless they
qualify as a circumvention of the objective of
Article 123 of the TFEU. For this reason, the word
‘direct’ should be inserted in Article 45(1) of the
BNB Law.
Pursuant to Article 45(2) in conjunction with
Article 33(2) of the BNB Law, Article 45(1) of the
BNB Law does not apply to the extension of
credits to state-owned and municipal banks in
emergency cases of liquidity risk that may affect
the stability of the banking system. The scope of
this exemption should be amended to be fully
consistent with the wording of Article 123(2) of
the TFEU and Article 21.3 of the ESCB/ECB
Statute.
2.1.4. Integration in the ESCB
Objectives
The objectives of the BNB are compatible with the
Treaty on the Functioning of the European Union.
The BNB Law and the Conflict of Interest
Prevention and Ascertainment Act are not fully
compatible with Article 131 of the TFEU as
regards central bank independence, the prohibition
of monetary financing and the integration in the
ESCB at the time of euro adoption.
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Chapter 2 - Bulgaria
2.2.
PRICE STABILITY
Graph 2.2:
Bulgaria - HICP inflation
(y-o-y percentage change)
6
2.2.1. Respect of the reference value
4
The 12-month average inflation rate, which is used
for the convergence assessment, was well below
the reference value at the time of the last
convergence assessment of Bulgaria in 2014.
Average annual inflation fell to -1.7% by January
2015, before starting to slowly rise again. In April
2016, the reference value was 0.7%, calculated as
the average of the 12-month average inflation rates
in Bulgaria, Slovenia and Spain plus 1.5
percentage points. The average inflation rate in
Bulgaria during the 12 months to April 2016
was -1.0%, i.e. 1.7 percentage points below the
reference value. The 12-month average inflation
rate is projected to remain well below the reference
value in the months ahead.
Graph 2.1:
Bulgaria - Inflation criterion since 2010
(percent, 12-month moving average)
5
4
2
0
-2
-4
2010
2011
2012
Bulgaria
2013
2014
Euro area
2015
Source: Eurostat.
3
2
1
0
-1
-2
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Bulgaria
Reference value
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
2.2.2. Recent inflation developments
The annual HICP inflation rate in Bulgaria has
been negative since summer 2013. This was
initially due to an unusually strong combination of
disinflationary factors, i.a. a good harvest,
administrative energy price reductions and
declining import prices. Weak domestic demand
and low inflation in the euro area sustained the
disinflationary environment and falling oil
commodity prices represented a new downward
price shock in 2014 and 2015. The inflation rate
reached its trough of -2.4% at the beginning of
2015 and then increased somewhat with the
passing or even partial reversal of the above
mentioned shocks. Headline inflation was
approaching positive territory by early 2016, but it
fell back sharply again in March and April, due
mainly to unprocessed food and fuel prices. The
inflation rate in Bulgaria has remained below that
of the euro area throughout the past two years.
Core inflation (measured as HICP inflation
excluding energy and unprocessed food) stayed
above headline inflation during most of 2014 and
2015, highlighting the effect of plunging energy
prices on inflation. Core inflation bottomed out
at -1.9% in late 2014 and increased to 0.4% by
October 2015. It then reversed and turned negative
again in early 2016, reaching -0.6% in April 2016.
The components of core inflation had trended
downwards over the past few years, reaching their
lows at different points in 2014 and they
demonstrated no clear trend since then. Processed
food prices were the first to turn around, partly due
to rising unprocessed food prices. After becoming
positive again in April 2015, they reached 1.0% at
end-2015. Non-energy industrial goods inflation
reflected both lower import prices and weak
domestic demand, as consumers have remained
cautious in spending, despite the strong growth in
real wages over the past years. It bottomed in
autumn 2014 at -2.4%, but remained deeply
negative even in early 2016. Services inflation was
the lowest in November 2014 at -2.7%, and after
increasing to 1.2% by October 2015, it fell back
to -0.5% by April 2016. Negative producer price
inflation confirmed the lack of cost pressures in
2014-2015 and reached about -4% in early 2016.
2.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
The economic recovery has accelerated in Bulgaria
with GDP growth of 1.5% in 2014 and 3% in
2015. Domestic demand had a good year in 2014,
but its growth slowed somewhat in 2015, while net
exports picked up. According to the Commission
services' Spring 2016 Forecast, the main driver of
Bulgaria's GDP growth is expected to shift
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Convergence Report 2016 - Technical annex
Chapter 2 - Bulgaria
Table 2.1:
Bulgaria - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
3.0
0.3
9.2
-1.6
7.5
1.5
2.5
2.1
3.6
2011
3.4
-0.4
8.9
1.6
7.7
1.9
2.6
3.2
2.5
2012
2.4
-0.8
7.9
4.4
1.5
2.4
1.2
2.4
4.9
2013
0.4
-1.5
-1.7
4.4
1.3
1.1
0.3
0.4
-1.1
2014
-1.6
-2.2
-3.8
-0.8
-0.4
-1.3
-1.3
-1.6
-1.0
(percentage change)
1)
2015
-1.1
-1.6
-6.7
0.6
0.6
0.1
-0.3
-1.1
1.6
Apr-16
-1.0
-1.5
-6.7
-1.0
1.1
0.2
-0.1
-1.1
0.5
weights
in total
2016
1000
276
107
75
214
328
818
1000
161
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
gradually back to domestic demand by 2017. The
purchasing power of households has been buoyed
by growth in real wages in a low-inflation
environment and economic sentiment remains
relatively high. Public investment is however
expected to decrease in 2016, with the slowdown
of the implementation of projects co-financed by
the EU. GDP growth is forecast to moderate to 2%
in 2016, before picking up to 2.4% in 2017. This
relatively modest growth momentum would imply
a persistent negative output gap.
The fiscal stance, as measured by the change in the
structural balance, has shifted over recent years.
Following years of consolidation, the fiscal stance
was expansionary in 2014 and broadly neutral in
2015. According to the Commission services'
Spring 2016 Forecast, the structural balance is
projected to remain broadly unchanged in 2016,
but to tighten in 2017.
In the context of its currency board arrangement to
the euro, most standard monetary policy
instruments are not available to Bulgaria. In
response to these limitations, the BNB has set
relatively conservative liquidity and capital
requirements on the banking sector. Bank interest
rates decreased over the past two years, reflecting
monetary easing in the euro area. However, private
sector lending continued to stagnate, with new
loans merely replacing maturing ones. The
domestic banking crisis in 2014 caused disruption
in financial intermediation. Overall, weak lending
still contributes to the current low-inflation
environment.
Wages and labour costs
moderate 0.4% in 2014 and 2015. This together
with a decrease in the labour force, partly due to
emigration, helped to reduce the unemployment
rate from 13% in 2013 to about 9% in 2015.
Nominal wage growth was dampened by negative
inflation over the past few years, in particular in
2015, despite continuing wage convergence
pressures and skills shortages in some sectors.
Graph 2.3:
Bulgaria - Inflation, productivity and wage trends
12
8
4
0
(y-o-y % change)
-4
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
Source: Eurostat, Commission services' Spring 2016 Forecast.
Labour productivity growth was weak in 2013-
2014, as the decline in employment ended, but it
picked up in 2015 with higher output growth.
Nominal unit labour cost growth slowed down
over the past two years, which mainly reflected the
rapidly declining growth of nominal compensation
per employee. Labour productivity growth is
expected to remain moderate over 2016-17, given
the gradual stabilisation of the labour market and
the lack of sufficient new investment. According to
the Commission services' Spring 2016 Forecast,
ULC growth is projected to pick up again in 2016
and 2017, in line with the evolution of nominal
compensation per employee.
The labour market has started to improve gradually
over 2014-15. Employment increased by a
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Table 2.2:
Bulgaria - Other inflation and cost indicators
2010
HICP inflation
Bulgaria
Euro area
Private consumption deflator
Bulgaria
Euro area
Bulgaria
Euro area
Labour productivity
Bulgaria
Euro area
Nominal unit labour costs
Bulgaria
Euro area
Imports of goods deflator
Bulgaria
Euro area
8.5
6.0
9.0
7.0
3.8
2.6
-2.8
-2.0
-2.9
-2.6
5.6
-0.6
2.8
0.6
4.8
1.9
7.0
1.1
4.4
1.0
4.1
2.8
3.9
1.5
2.8
-0.1
1.7
0.6
1.2
0.3
2.4
1.6
9.9
2.2
4.5
2.3
6.8
2.2
3.6
1.9
7.7
1.8
-2.5
1.1
8.8
1.7
-0.1
0.5
5.6
1.3
3.0
1.6
3.4
2.7
2.4
2.5
0.4
1.3
-1.6
0.4
2011
2012
2013
2014
(annual percentage change)
2015
-1.1
0.0
-0.8
0.2
1.8
1.2
2.6
0.6
-0.7
0.7
-3.7
-3.6
2016
1)
-0.7
0.2
-0.7
0.4
3.6
1.5
1.7
0.5
1.9
0.9
-3.0
-2.7
2017
1)
0.9
1.4
0.9
1.3
4.3
1.9
2.0
0.8
2.3
1.1
1.6
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
External factors
Given the high openness of the Bulgarian
economy, developments in import prices play an
important role in domestic price formation. Global
energy and food prices are particularly relevant for
inflation, given their relatively large share in the
consumer basket and the high energy intensity of
the Bulgarian economy. Import prices (measured
by the imports of goods deflator) had a strong
disinflationary effect over the past three years,
falling by nearly -3% per year. This reflects mainly
the lower international oil price and the stronger
nominal effective exchange rate of the lev. Import
prices are expected to continue declining also in
2016. In particular, the fall in the oil price is
expected to pass through to lower energy-related
inflation. It should be noted that Bulgaria depends
on a single source of gas supply and negotiates gas
prices bilaterally, occasionally diverging from
global price trends.
The nominal effective exchange rate of the lev
(measured against a group of 36 trading partners)
appreciated by about 4% from mid-2013 until
early 2014, as some currencies of major trading
partners depreciated against the euro (Turkish Lira,
Russian Rouble, Romanian Leu). About half of
this appreciation had been unwound by early 2016,
but the stronger nominal effective exchange rate
contributed to lower import prices over the
assessment period. On the other hand, the
depreciation of the euro (and hence of the lev)
against the US dollar in 2014-2015 cushioned
somewhat the disinflationary impact of lower oil
prices.
Administered prices and taxes
The growth rate of administered prices (
11
) was
above headline consumer price inflation in
Bulgaria over the past two years, but indirect tax
changes played overall a negligible role. The share
of administered prices in the HICP basket is
relatively high in Bulgaria at around 16%
compared to 13% in the euro area. The annual
change of administered prices turned from a 1%
decline in 2014 to an increase of 1.5% in 2015. In
particular, household electricity prices were
increased in mid-2014 and in late 2014. Overall,
administered prices raised headline inflation in
2014 by about 0.1 percentage points (by
decreasing less than the headline) and in 2015 by
about 0.5 percentage points.
(
11
) According to the Eurostat definition, administered prices in
Bulgaria include inter alia electricity and other regulated
utility prices, pharmaceutical products, hospital services,
part of public transport and education. For details, see
http://ec.europa.eu/eurostat/documents/272892/272989/HI
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
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Indirect tax changes had on aggregate an
insignificant effect on inflation over 2014-15.
During this period, annual constant-tax HICP was
on average at the same level as headline inflation.
In early 2016, a tobacco excise tax increase took
place, but annual constant-tax HICP was on
average broadly at the same level as headline
inflation during the assessment period.
Medium-term prospects
Annual HICP inflation is expected to rise
gradually as the effect from the decline in
commodity prices slowly tapers off; however it is
to remain negative throughout the first three
quarters of 2016. In the meantime, the weaker euro
and the tightening domestic labour market
conditions are expected to exert some upward
price pressure. Accordingly, the Commission
services' Spring 2016 Forecast projects HICP
inflation to average -0.7% in 2016 and 0.9% in
2017.
Risks to the inflation outlook appear broadly
balanced, with the most significant risks related to
global energy and food price developments, given
their relatively large share in the Bulgarian
consumer basket. Additional inflation risk factors
are core inflation movements elsewhere in the EU
and administered prices changes.
The level of consumer prices in Bulgaria was at
47% of the euro area average in 2014. Over the
long run, there is significant potential for further
price level convergence, in line with the expected
catching-up of the Bulgarian economy (Bulgaria's
income level was at about 44% of the euro area
average in PPS terms in 2014).
Medium-term inflation prospects will depend on
wage and productivity developments, as well as on
global commodity price trends. Tax policy is
expected to have only a limited impact on
inflation.
Bulgaria (
12
). The general government deficit was
kept well below the Treaty reference value of 3%
of GDP in 2012 and in 2013. Although the general
government deficit reached 5.4% of GDP in 2014,
the Commission concluded in its November 2015
report in accordance with Art 126(3) of the TFEU
that the excess over the reference value could be
qualified as exceptional and temporary and also
taking into account all relevant factors the opening
of an EDP was not suggested (
13
). The
expenditure-to-GDP ratio increased by 2.6 pp.
between 2013 and 2015 to 40.2%, which was
somewhat counterbalanced by an increase in the
revenue ratio by 1.0 pp. of GDP to 38.2%. The
increase in the expenditure ratio mainly reflects a
higher investment ratio, partly stemming from
increased absorption of EU funds. The higher
revenue ratio reflects both more capital transfers
from the EU and more tax revenue partly in light
of enhanced tax collection.
The general government deficit in 2015 reached
2.1% of GDP, i.e. below the target of 2.8% of
GDP in the 2015 Convergence Programme. The
better outcome mainly reflects higher tax revenues,
mostly attributable to improved tax administration.
Those additional revenues more than offset various
expenditure slippages, such as the incomplete
implementation of the planned reduction of the
public wage bill. In structural terms, the deficit
improved by 0.1 pp. in 2015. As the output gap
remained broadly unchanged (slight negative) in
the period of 2013-2015, the actual growth
performance had a neutral impact on the fiscal
consolidation.
General government gross debt increased from
17.1% of GDP in 2013 to 27% of GDP in 2014.
This reflected not only the underlying budget
deficit in 2014 but also the pay-out of guaranteed
deposits, support to the financial sector via a
liquidity scheme and pre-financing for a roll-over
of a large bond maturing in January 2015. The
gross public debt ratio slightly decreased to 26.7%
of GDP in 2015.
2.3.
PUBLIC FINANCES
2.3.1. Recent fiscal developments
On 22 June 2012, the Council decided to abrogate
the decision on the existence of an excessive
deficit according to Article 126 (12) TFEU,
thereby closing the excessive deficit procedure for
(
12
) An overview of all excessive deficit procedures can be
found at: http://ec.europa.eu/economy_finance/economic_
governance/sgp/deficit/index_en.htm
(
13
) The 2014 deficit was negatively affected by the statistical
re-classification inside the general government of the
Deposit Insurance Fund following the repayment of the
guaranteed deposits in the Corporate Commercial Bank
(KTB) amounting to around 3.0% of GDP.
20
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Table 2.3:
Bulgaria - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
2)
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP growth (%)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ calculations on the basis of the information in the programme.
There are no one-off and other temporary measures in the programme.
Sources: Commission services, the 2016 Convergence Programme of Bulgaria
1)
(as % of GDP unless indicated otherwise)
2013
-0.4
37.2
37.6
0.7
28.0
0.3
-0.3
0.0
-0.3
17.1
1.3
-0.3
2014
-5.4
36.6
42.1
0.9
28.1
-4.6
-5.2
-3.2
-2.0
27.0
1.5
-0.7
2015
-2.1
38.2
40.2
1.0
29.8
-1.1
-2.0
-0.1
-1.9
26.7
3.0
-0.3
2016
-2.0
37.0
38.9
1.0
30.1
-0.9
-1.8
0.0
-1.8
28.1
2.0
-0.6
2016
-1.9
-1.7
31.7
2.1
2017
-1.6
37.2
38.7
1.0
30.3
-0.5
-1.4
0.0
-1.4
28.7
2.4
-0.5
2017
-0.8
-0.5
31.2
2.5
2018
-0.4
-0.2
31.8
2.7
2019
-0.2
0.0
30.8
2.7
2010
-3.2
33.5
36.7
0.7
26.4
-2.4
-2.6
-0.1
-2.5
15.5
0.1
-1.8
2011
-2.0
32.1
34.1
0.7
25.5
-1.3
-1.9
0.0
-1.8
15.3
1.6
-0.4
2012
-0.3
34.4
34.7
0.8
26.7
0.5
-0.1
0.0
-0.1
16.8
0.2
-0.6
General government balance
2.3.2. Medium-term prospects
The 2016 budget was adopted by Parliament on 2
December 2015. It aims at achieving a general
government deficit of 1.9% of GDP based on a
number of measures both on the revenue and on
the expenditure side. First, strengthening of tax
compliance in light of exercising fiscal control and
forced collection of arrears is expected to increase
tax revenues by ¼% of GDP. Increase in excise
duty on fuel and cigarettes would imply higher
revenues of 0.2% of GDP, which could be partly
off-set by the fuel voucher system provided in the
agriculture sector. Higher revenues from the hike
of road tolls and the concession revenues related to
the transport sector as well as the lower national
co-financing related to the absorption of the EU-
funds are partly counterbalanced by the budgeted
higher public investments from own resources.
According to the Commission services' Spring
2016 Forecast, the general government deficit is
foreseen to be 2% of GDP.
In 2017, the Commission forecasts the general
government balance to improve and achieve a
deficit of 1.6% of GDP in light of some revenue
increasing measures and of the economic growth.
Taking into account the negative output gap
estimated by 2017, the structural deficit is
projected to be 1.4% of GDP. The public-debt-to-
GDP ratio is forecast to increase from 27% in 2014
to around 29% by 2017.
Bulgaria submitted the 2016 update of the
Convergence Programme on 15 April 2016. The
Programme aims at the gradual improvement of
the general government balance from 1.9% of
GDP in 2016 to 0.8% of GDP in 2017 and further
to 0.2% of GDP in 2019. Also, the Programme
targets the achievement of the medium-term
objective of a structural deficit of 1% of GDP in
2017. In 2017, compared with the Commission
forecast of 1.6% of GDP, the targeted
improvement of the deficit is ambitious and
specification of further deficit decreasing measures
are likely to be needed to be achieved. Based on
the assessment of the convergence programme and
taking into account the Commission services'
Spring 2016 Forecast, the Commission is of the
opinion that Bulgaria is expected to broadly
comply with the provisions of the Stability and
Growth Pact. Further details can be found in the
21
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Assessment of the 2016 Convergence Programme
for Bulgaria (
14
).
As far as the national fiscal framework is
concerned – which refers to numerical fiscal rules,
medium-term budgetary frameworks, independent
fiscal institutions, and budgetary procedures – the
Bulgarian system has gradually been strengthened
over the last few years, also driven by EU legal
requirements. Bulgaria declared its intention to
apply the provisions of the Fiscal Compact (
15
).
The main milestones of the reform were the
introduction of a wide set of numerical rules at the
general government level, and an improved
medium-term budgetary framework in 2014. Over
the course of 2015, the reform process was
continued by the stipulation of an automatic
correction mechanism in case of a significant
divergence from the targeted structural balance
position as well as by the establishment of the
Fiscal Council, entrusted with a broad mandate
including monitoring compliance with national
fiscal rules. The Fiscal Council members were
appointed by Parliament at the end of 2015,
however, the body is not yet fully operational.
subsequently to the euro (at an exchange rate of
1.95583 BGN/EUR). Under the CBA, the BNB’s
monetary liabilities have to be fully covered by its
foreign reserves. The BNB is obliged to exchange
monetary liabilities and euro at the official
exchange rate without any limit. The CBA serves
as a key macroeconomic policy anchor.
Over the past two years, the CBA continued to
operate in a challenging environment, with low
nominal GDP growth, weak credit flows and
contagion risks in the banking sector related both
to the failing domestic banks and Greece.
However, growing exports, a favourable external
funding position of the banking sector and sizable
reserve buffers have underpinned the resilience of
the CBA.
Bulgaria's international reserves increased from
around EUR 14 billion to over EUR 20 billion
between mid-2014 and end-2015. International
reserves were boosted by the issuance of EUR 3.1
billion in long-term, foreign-currency government
debt in March 2015 and by BNB macroprudential
action to reduce spill-over risks from Greece via
the repatriation of banking sector foreign assets.
International reserves covered around 144% of the
monetary base, about 166% of short-term debt (
16
),
54% of broad money (M3) and about 46% of GDP
as of end-2015. A high reserve coverage was
deliberately built into the framework for Bulgaria's
CBA, to cater for potential financial sector stress
following the 1996-97 crisis.
Graph 2.5:
Bulgaria - 3-M Sofibor spread to 3-M Euribor
(basis points, monthly values)
400
2.4.
EXCHANGE RATE STABILITY
Graph 2.4:
Bulgaria - BGN/EUR exchange rate
(monthly averages)
2.1
2.0
1.9
300
1.8
2010
2011
2012
2013
2014
2015
2016
200
Source: ECB.
100
The Bulgarian lev does not participate in ERM II.
The BNB pursues its primary objective of price
stability through an exchange rate anchor in the
context of a currency board arrangement (CBA).
Bulgaria introduced its CBA on 1 July 1997,
pegging the Bulgarian lev to the German mark and
(
14
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
(
15
) Title III of the intergovernmental Treaty on Stability,
Coordination and Governance in the Economic and
Monetary Union.
0
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat.
The BNB does not set monetary policy interest
rates. The domestic interest rate environment is
directly affected by the monetary policy of the
euro area through the operation of Bulgaria's CBA.
Short-term interest rate differentials vis-à-vis the
(
16
) Based on estimated residual maturity
22
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Chapter 2 - Bulgaria
euro area were quite stable over the past two years.
The 3-month spread hovered around 55 basis
points till end 2015 and declined to around 40
basis points in early 2016.
Graph 2.7:
Bulgaria - Long-term interest rates
8
(percent, monthly values)
6
2.5.
LONG-TERM INTEREST RATES
4
For Bulgaria, the development of long-term
interest rates over the current reference period is
assessed on the basis of secondary market yields
on a single benchmark government bond with a
residual maturity of close to but below 10 years.
The Bulgarian 12-month moving average long-
term interest rate relevant for the assessment of the
Treaty criterion was below the reference value at
the 2014 convergence assessment of Bulgaria. It
declined from around 3.5% in mid-2014 to around
2.5% by end-2015. In April 2016, the latest month
for which data are available, the reference value,
given by the average of long-term interest rates in
Bulgaria, Slovenia and Spain plus 2 percentage
points, stood at 4.0%. In that month, the twelve-
month moving average of the yield on the
Bulgarian benchmark bond stood at 2.5%, i.e.
about 1.5 percentage points below the reference
value.
Graph 2.6:
Bulgaria - Long-term interest rate criterion
(percent, 12-month moving average)
12
10
8
6
4
2
2
0
2010
2011
2012
Bulgaria
2013
2014
Germany
2015
2016
Source: Eurostat.
Spreads to the Bund increased by almost 100 basis
points between mid-2014 and November 2014,
partly reflecting Bulgaria's banking problems.
Then they started to decline gradually, reaching
post-2008 financial crisis lows in mid-2015, before
rising again from late 2015, partly linked with the
Fed's policy tightening. The spread to the German
benchmark bond was at around 230 basis points in
April 2016 (
17
).
2.6.
ADDITIONAL FACTORS
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product, labour and financial
market integration – gives an important indication
of a Member State's ability to integrate into the
euro area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
18
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Bulgaria exceeded the
indicative threshold in four out of fourteen
indicators, two in the area of external imbalances
(i.e. the net international investment position and
nominal unit labour cost) and two in the area of
internal imbalances (i.e. unemployment and long-
term unemployment rate). In line with the
conclusion of the AMR 2016 (i.e. that imbalances
had been identified for Bulgaria in the previous
(
17
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
(
18
)
http://ec.europa.eu/europe2020/pdf/2016/ags2016_al
ert_mechanism_report.pdf
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Bulgaria
Reference value
Source: Commission services.
The long-term interest rate of Bulgaria increased
somewhat in mid-2014, partly reflecting its
domestic banking sector problems. Bulgarian
benchmark bond yields started to fall again at end-
2014, as the political situation stabilised with the
formation of a new government and depositors of
KTB were finally able to access their frozen bank
deposits. In early 2015, Bulgaria's long-term
interest rate fell significantly, supported by strong
demand for its government securities, partly due to
the spill-over from the ECB's public sector asset
purchase programme.
23
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Table 2.4:
Bulgaria - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
0.3
-6.6
6.7
-3.9
4.1
1.2
1.6
3.3
-2.9
0.9
4.9
0.4
2.9
1.7
21.6
22.0
91.6
-83.4
2012
-0.9
-9.6
6.2
-2.5
5.0
1.3
0.5
2.3
-2.6
2.1
-2.4
5.1
-2.8
1.8
22.1
20.8
93.2
-78.4
2013
1.3
-7.0
6.3
-3.8
5.7
1.1
2.4
2.1
-3.0
0.3
6.0
-1.3
3.4
-0.3
21.4
22.9
91.1
-73.5
2014
0.9
-6.5
5.9
-2.3
3.8
2.2
3.1
-0.7
-2.1
-2.8
0.0
4.2
-4.9
-3.8
21.4
24.2
97.4
-74.8
2015
1.4
-4.3
6.1
-4.1
3.7
3.2
4.6
6.3
-3.4
-1.3
2.6
8.4
-2.1
1.7
21.3
23.2
82.9
-60.7
-1.7
-9.5
6.4
-2.7
4.0
0.8
-1.0
1.8
-2.5
1.8
3.2
-0.6
2.5
2.8
22.9
20.9
100.3
-93.2
of which: Direct investment
Portfolio investment
Other investment
3)
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, Bulgarian National Bank.
MIP round), Bulgaria was subject to an in-depth
review, which found that Bulgaria continued to
experience excessive macroeconomic imbalances.
The economy is characterised by remaining
fragilities in the financial sector and high corporate
indebtedness in a context of limited labour market
adjustment.
2.6.1. Developments
payments
of
the
balance
of
increased in the last couple of years, from 1.1% of
GDP in 2013 to over 3% of GDP in 2015, mainly
due to an increase in the absorption of EU funds.
The primary income balance stayed negative,
reflecting the negative net international investment
position, but it was counterbalanced by a surplus
of secondary income.
Graph 2.8:
Bulgaria - Saving and investment
30
(in percent of GDP at market prices)
Bulgaria's external balance (i.e. the combined
current and capital account) has been in surplus
since 2011, following a rapid adjustment from
deficits above 20% of GDP in 2007-08. The
surplus of the external balance reached 3.1% of
GDP in 2014 and rose to 4.6% of GDP in 2015,
partly due to strong export growth. The latter was
also reflected in the trade balance of goods, which
although still negative has improved strongly in
2015, by more than two percentage points of GDP.
The trade balance in services has remained
positive owing to stable growth in the tourism,
transportation and business process outsourcing
sectors and reached about 6% of GDP both in 2014
and 2015. The capital account surplus also
20
10
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
The large saving-investment gap of the Bulgarian
economy observed in 2007-08 closed by 2013.
Gross national saving was supported by
households and companies, and reached around
23% of GDP both in 2013 and 2015. On the other
24
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Table 2.5:
Bulgaria - Market integration
2010
Trade openness
1)
2011
62.9
28.0
5.6
59
74
0.9
90.4
2.3
2012
66.3
28.8
0.8
66
62
0.6
85.6
1.7
2013
68.3
29.7
7.5
58
57
0.3
85.9
1.7
2014
69.1
30.7
-3.4
36
54
0.9
87.2
1.6
2015
69.3
31.5
5.8
38
54
0.7
90.3
1.6
(%)
56.2
24.6
7.1
57
71
0.4
100.0
2.7
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
4)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
6)
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
hand, private investment remained low, as negative
inflation, which started in mid-2013, increased the
burden of debt-servicing. In addition, the still
unsupportive business environment and increased
perceived risks from the financial sector turmoil in
2014 influenced the investment climate negatively.
Meanwhile, the public sector increased its
investment in 2014-2015, thanks mainly to EU
funds.
Graph 2.9:
Bulgaria - Effective exchange rates
130
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
120
110
The financial account without official reserves
recorded significant net inflows in 2014 and 2015.
Net FDI inflows have remained at low levels by
pre-crisis standards, reaching around 2% of GDP
in 2014 and 3% of GDP in 2015. The net inflow of
portfolio investment in 2014 and 2015, reflected
i.a. increased government borrowing. The positive
balance of net other inflows in 2015 represented
mainly the build-up of foreign assets of the
banking sector. Although still high, gross external
debt has improved further in the past two years,
from about 91% of GDP in 2013 to around 83% of
GDP in 2015, due to reduced foreign liabilities of
the banking sector and some corporate
deleveraging. The net international investment
position has also improved, from around 73% of
GDP in 2013 to around 61% of GDP in 2015.
According to the Commission services’ Spring
2016 Forecast, the external surplus is projected at
3.5% of GDP 2016 and at 3.8% of GDP in 2017.
100
90
2010
2011
NEER
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
2.6.2. Market integration
Competitiveness seems to have been preserved in
the past two years, although relevant indicators
show a somewhat mixed picture. The real effective
exchange rate, deflated by ULC, appreciated
significantly between mid-2012 and early 2014. It
then depreciated for about a year and has stabilised
since early 2015. After a long period of
improvement, Bulgaria's export performance
deteriorated in 2014, before it picked up again in
2015.
The Bulgarian economy is well integrated with the
euro area through trade and investment linkages.
As a small open economy, Bulgaria is
characterised by a high ratio of trade openness,
which increased from a low post-crisis level of
56% in 2010 to around 69% in 2015. Trade with
the euro area expressed in percentage of GDP
reached about 31% in 2015. Beyond the euro-area,
the main trading partners are Romania, Russia and
Turkey.
25
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The stock of FDI in Bulgaria amounted to some
80% of GDP in 2014, with FDI mainly originating
in the Netherlands, Austria, the UK and Greece.
The main recipient sectors of FDI were services
(chiefly real estate, renting and business activities,
financial intermediation and trade) and to a lesser
extent manufacturing (17% of the total) and
construction.
Concerning the business environment, Bulgaria
performs in general worse than most euro-area
Member States in international rankings. The
difference to the euro-area average is more
pronounced based on the WEF's Global
Competitiveness Index than on the World Bank's
Ease of Doing Business indicator, but Bulgaria's
position deteriorated with the latter in 2015. Public
administration as a whole scores relatively poorly
according to the World Bank's Worldwide
Governance Indicators. According to the May
2015 Internal Market Scoreboard, Bulgaria's
transposition deficit of EU Directives was at 0.7%
which is above the target (0.5%) proposed by the
European Commission in the Single Market Act
(2011).
The Bulgarian labour market adjusted to the
economic shock of 2008-2013 by shedding labour
rather than by lowering wages, in a context of
generally
flexible wage-setting conditions.
Following the initial labour shedding, the economy
has not been able to absorb the available supply of
labour because of structural issues, including the
employability effects of long-term unemployment
and skills mismatches. The Bulgarian labour
market was characterised by persistent emigration,
which is fundamentally driven by the large income
gap with other EU Member States.
Graph 2.10:
Bulgaria - Foreign ownership and concentration
in the banking sector
90
(in percent, weighted averages)
80
70
60
50
40
30
20
10
0
BG, 2010
BG, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
total bank assets reached 76% in 2014. Bank
concentration, as measured by the market share of
the five largest credit institutions in total assets,
remained somewhat above the euro area average in
2014.
The banking system came under strong liquidity
pressure in June 2014 due to deposit withdrawals
by individuals and firms. This led to placing the
fourth-largest bank, Corporate Commercial Bank
(KTB), and its subsidiary in a regime of special
supervision. In addition, the third-biggest bank,
First Investment Bank, required state liquidity aid.
Guaranteed deposits of KTB became available
only in December 2014, more than five months
after its banking activities were suspended.
Nevertheless, public confidence in banks appears
to have recovered and deposit flows have
normalised since the summer 2014 liquidity crisis.
The deposit-guarantee and bank-resolution
frameworks were strengthened with the
transposition of the relevant EU directives into
national law.
Graph 2.11:
Bulgaria - Selected banking sector soundness
indicators
%
25
20
15
10
5
0
BG, 2010
Return on equity
BG, Q3-15
EA, 2010
EA, Q3-15
Capital adequacy
Non performing loans
Source: ECB, EC calculations.
Source: ECB, Structural financial indicators.
Bulgaria's financial sector is well integrated with
the EU financial sector, in particular through a
high level of foreign ownership in its banking
system. The share of foreign-owned institutions in
Based on the available data, the capital adequacy
of the banking sector measured by standard
regulatory ratios is somewhat higher than in the
euro area. The average capital adequacy ratio stood
close to 22% in September 2015. The deterioration
of the loan portfolio that started in 2008 has halted,
but the share of non-performing loans still reached
13% at end-September 2015, well above the euro-
area average. Profitability of the domestic banking
sector remained above the euro-area level, with
average return on equity (RoE) above 4% in 2014.
However, a robust assessment of the soundness of
the banking sector can only be made based on the
results of the ongoing asset quality review and
stress test, which are expected to end in August.
Similar reviews are currently being conducted in
the insurance and pension fund sectors.
26
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After the pre-2009 boom, real house prices in
Bulgaria fell till 2012. There has been a slow
recovery since then, but the real house price index
reached still only 90.3% of its 2010 level in 2015.
Residential investment hovered below 2% of GDP
in recent years as the stock of loans for house
purchases decreased in 2014-2015.
Graph 2.12:
Bulgaria - Recent development of the financial
system relative to the euro area
180
(in percentage of GDP)
160
140
120
100
80
60
40
20
0
BG, 2010
BG, 2015
EA, 2010
EA, 2015
Debt securities
Credit to non-financial corporations
Stock market capitalisation
Credit to households
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
The financial system in Bulgaria is smaller relative
to GDP than that of the euro area. Domestic bank
credit stood at around 56% of GDP in 2015, with
the majority of it denominated in foreign-
currencies. The capitalization of the stock market
reached less than 10% of GDP in 2015, well below
the euro-area average of 60%. The debt securities
market remains small in comparison with the euro
area average (25% vs. 158% of GDP) and is
mainly used for financing a part of Bulgaria's
relatively low public debt. The consolidated stock
of private sector debt at 124% of GDP in 2014 was
somewhat below the euro-area average of 138%.
27
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3.
3.1.
CZECH REPUBLIC
LEGAL COMPATIBILITY
wording of Article 47(5) of the ČNB Law
constitutes an incompatibility which should be
removed from the Act.
Article 6(10) of the ČNB Law provides that
members of the Bank Board, which also includes
the Governor, may be relieved from office only if
they no longer fulfil the conditions required for the
performance of their duties or if they have been
guilty of serious misconduct. Although article
6(10) of the ČNB Law extends the protection
offered by article 14.2 of the ESCB/ECB Statute to
Governors against arbitrary dismissal to all Bank
Board members of the ČNB, it remains silent on
the Governor’s right in case of dismissal to seek a
remedy before the Court of Justice of the European
Union. However, pursuant to footnote 22, the
Commission understands that the possibility to
seek legal redress by the Governor before the ECJ,
as enshrined in article 14.2 of the ESCB/ECB
Statute, would apply. However, the ČNB Law
would benefit from a more explicit clarification. .
Pursuant to Article 11(1) of the ČNB Law, the
Minister of Finance or another nominated member
of the Government may attend the meetings of the
Bank Board in an advisory capacity and may
submit motions for discussion. Article 11(2)
entitles the Governor of the ČNB, or a Vice-
Governor nominated by him, to attend the
meetings of the Government in an advisory
capacity. With regard to Article 11(1) of the ČNB
Law, although a dialogue between a central bank
and third parties is not prohibited as such, it should
be ensured that this dialogue is constructed in such
a way that the Government should not be in a
position to influence the central bank when the
latter is adopting decisions for which its
independence is protected by the TFEU. The active
participation of the Minister, even without voting
right, to discussions where monetary policy is set
would structurally give to the Government the
opportunity to influence the central bank when
taking its key decisions. Therefore, Article 11(1)
of the ČNB Law is incompatible with Article 130
of the TFEU, as Member States have to undertake
not to seek to influence the members of the
decision-making bodies of the national central
bank.
3.1.1. Introduction
Česká národní banka (ČNB – Czech national bank)
was established on January 1, 1993. Its main legal
basis is the Czech National Council Act No.
6/1993 Coll. on the Czech National Bank, adopted
on 17 December 1992 (the ČNB Law).
Following the Convergence Report 2014, the ČNB
Law was amended by several laws. (
19
) However,
since there have been no amendments as regards
the
incompatibilities
highlighted
in
the
Commission's 2014 Convergence Report, the
comments made in the latter are largely repeated in
this year's assessment.
3.1.2. Central Bank independence
Article 9(1) of the ČNB Law prohibits the ČNB
and its Board from taking instructions from the
President of the Czech Republic, Parliament, the
Government, administrative authorities, European
Union institutions, any government of a Member
State of the European Union or any other body.
Further, Article 9(1) of the ČNB Law needs to be
adapted to fully reflect the provisions of Article
130 of the TFEU and Article 7 of the Statute and
consequently expressly prohibit third parties from
giving instructions to the ČNB and its Board
members who are involved in the performance of
ESCB-related tasks.
The power for the Chamber of Deputies of the
Parliament to impose modifications to the annual
financial report which was previously submitted
and rejected (Article 47(5) of the ČNB Law) could
hamper the ČNB’s institutional independence.
Moreover, it is formulated in a very general
manner which could create situations where the
Parliament requests changes affecting the financial
independence of the ČNB. Thus, the current
(
19
) Act 135/2014 Coll., Act 204/2015 Coll, Act 375/2015 Act
and 377/2015 Coll. In particular, Act 375/2015 Coll.
amending relevant legislation in relation to the enactment
of the Financial Crisis Prevention and Resolution Act and
to the changes in the deposit insurance system adds
provisions in the field of resolution and the possibility for
the ČNB to provide at its discretion emergency liquidity
assistance to the Financial Market Guarantee System.
29
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3.1.3. Prohibition of monetary financing and
privileged access
Article 34a(1) first half-sentence of the ČNB Law
prohibits the ČNB from providing overdraft
facilities or any other type of credit facility to the
bodies, institutions or other entities of the
European Union, central governments, regional or
local authorities or other bodies governed by
public law, other entities governed by public law
or public undertakings of the Member States of the
European Union. The list of entities does not fully
mirror the one in Article 123(1) of the TFEU and,
therefore, has to be amended.
Moreover, the footnote in Article 34a(1) of the
ČNB Law should refer to Article 123(2) of the
TFEU instead of globally to Article 123 of the
TFEU.
3.1.4. Integration in the ESCB
Objectives
non-recognition of the competences of the ECB
and of the Council on the banknotes and coins
(Article 2(2)(b), Articles 12 to 22 of the ČNB
Law);
ECB's right to impose sanctions (Article 46a of the
ČNB Law).
the possibility for Parliament to demand
amendments to the report of the ČNB on
monetary policy developments and to
determine
the
content/scope
of
the
extraordinary report in view of the absence of a
specification regarding the non-forward
looking nature of the reports (Article 3 of the
ČNB Law)
There are also some imperfections regarding:
the absence of reference of the role of the ECB and
of the EU in the collection of statistics (Article
41);
non-recognition of the role of the ECB in the
functioning of the payment systems (Articles 2.2
c), 38 and 38a of the ČNB Law);
non-recognition of the role of the ECB and of the
Council in the appointment of the external audit of
the ČNB (Article 48(2) of the ČNB Law);
absence of an obligation to comply with the
Eurosystem's regime for the financial reporting of
NCB operations (Article 48 of the ČNB Law);
non-recognition of the role of the ECB in the field
of international cooperation (Article 2(3) of the
ČNB Law).
3.1.5. Assessment of compatibility
Pursuant to Article 2(1) of the ČNB Law, "in
addition" to the ČNB's primary objective of
maintaining price stability, the ČNB shall work to
ensure financial stability and the safety and sound
operation of the financial system and – without
prejudice to its primary objective – support the
general economic policies of the Government and
the European Union. Article 2(1) of the ČNB Law
needs to be amended with a view to achieving
compatibility with Article 127 TFEU and Article 2
of the ESCB/ECB Statute. Compatibility with the
ESCB's objectives requires a clear supremacy of
the primary objective over any other objective.
Tasks
The incompatibilities in this area, following the
TFEU provisions and ESCB/ECB Statute, include:
definition of monetary policy and monetary
functions, operations and instruments of the
ECB/ESCB (Articles 2(2)(a), 5(1) and 23 to 26,
28, 29, 32, 33 of the ČNB Law);
conduct of exchange rate operations and the
definition of exchange rate policy (Articles 35 and
36 of the ČNB Law);
holding and management of foreign reserves
(Articles 35(c), 36 and 47a of the ČNB Law);
As regards the independence of the central bank,
the prohibition of monetary financing and the
integration of the central bank in the ESCB at the
time of euro adoption, the ČNB Law is not fully
compatible with the compliance duty under Article
131 of the TFEU.
3.2.
PRICE STABILITY
3.2.1. Respect of the reference value
The 12-month average inflation rate, which is used
for the convergence assessment, was below the
30
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Convergence Report 2016 - Technical annex
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reference value at the time of the last convergence
assessment of the Czech Republic in 2014. It
declined gradually to below 0.4% in early 2015
and then remained broadly stable up to late 2015
when it fell below 0.3%. In April 2016, the
reference value was 0.7%, calculated as the
average of the 12-month average inflation rates in
Bulgaria, Slovenia and Spain plus 1.5 percentage
points. The corresponding inflation rate in the
Czech Republic was 0.4%, i.e. 0.3 percentage
points below the reference value. The 12-month
average inflation rate is projected to remain below
the reference value in the months ahead.
Graph 3.1:
Czech Republic - Inflation criterion since 2010
(percent, 12-month moving average)
5
4
3
2
nominal effective exchange rate and strengthening
domestic demand. Prices of processed food
continued to increase but at a slower rate than in
2011-2013, due to lower contributions from input
prices and changes in indirect taxes. These factors
also led to slower growth in the price of services in
2014, although growth accelerated in 2015 amid
strengthening domestic demand. Core inflation
exceeded headline inflation in 2014 and 2015 as a
result of the negative contribution of energy prices
to the headline rate in these years. Producer price
inflation for total industry was negative in both
years, falling to -3.2% in 2015, highlighting weak
supply-side cost pressures.
Graph 3.2:
Czech Republic - HICP inflation
(y-o-y percentage change)
6
4
2
1
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Czech Republic
Reference value
0
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
-2
2010
2011
2012
2013
2014
2015
Euro area
Czech Republic
Source: Eurostat.
3.2.2. Recent inflation developments
Price growth moderated significantly in 2014, with
the HICP inflation rate slowing to 0.4% from 1.4%
in the previous year. This was largely due to a
large negative contribution from energy prices,
reflecting the pass-through of a sharp decline in oil
prices to domestic fuel prices. Falling food prices
also contributed to weak price growth in the
second half of 2014. Inflation accelerated
somewhat during the first half of 2015, as the
negative contribution of energy prices moderated
while food and administered prices recorded some
modest increases. There was a sharp slowdown in
the second half of the year, however, amid
renewed declines in food and energy prices. The
annual HICP inflation rate averaged 0.3% in 2015.
It picked up somewhat in early 2016 and stood at
0.5% in April 2016.
Core inflation (measured as HICP inflation
excluding energy and unprocessed food) averaged
about 1% in 2014-2015, reflecting weak
underlying price pressures in the economy. Prices
of non-energy industrial goods, which had
declined every year since 2002, rose moderately in
2014 and 2015, reflecting the koruna's weaker
3.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
The Czech Republic emerged from a 2-year
recession in 2014, with domestic demand acting as
the main driver of growth. The growth rate of
private consumption accelerated in 2014 and 2015,
amid falling unemployment and higher real
disposable income. Gross fixed capital formation
has contributed positively to real GDP growth in
the last two years, particularly in 2015, also
reflecting a significant increase in public
investment co-financed by EU funds. The level of
such investment is expected to fall in 2016,
however, contributing to slower real GDP growth.
According to the Commission services' Spring
2016 Forecast, real GDP growth is expected to
slow to 2.1% in 2016, compared to 4.2% in 2015.
Growth is then expected to accelerate to 2.6% in
2017 amid renewed growth in investment. While
the Czech economy is estimated to have operated
below its potential in the period 2009-2014, the
31
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Convergence Report 2016 - Technical annex
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Table 3.1:
Czech Republic - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
1.2
-2.4
4.3
3.5
2.1
1.9
0.4
-0.1
5.1
2011
2.2
-1.7
7.2
0.7
5.9
1.1
1.4
2.2
2.8
2012
3.5
-0.5
7.7
7.6
5.0
3.1
2.5
2.2
8.3
2013
1.4
-0.5
0.6
7.2
3.0
1.0
1.0
0.4
3.5
2014
0.4
0.4
-3.8
1.2
2.7
0.6
1.1
0.3
0.4
(percentage change)
1)
2015
0.3
0.5
-3.0
0.7
1.1
0.9
0.8
0.1
0.5
Apr-16
0.4
0.6
-3.0
2.4
0.5
1.1
0.8
0.2
0.8
weights
in total
2016
1000
242
137
77
209
335
786
1000
102
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
output gap is estimated to have closed in 2015 and
is projected to be positive in 2016 and 2017.
The fiscal stance, as measured by the change in the
structural balance, was accommodative in 2014.
The structural balance deteriorated from a minor
surplus in 2013 to a deficit of about 0.8% of GDP
in 2014 before improving again to -0.4% of GDP
in 2015. Its evolution largely reflected
developments in the headline deficit and fading
one-off factors. The structural balance is expected
to deteriorate somewhat in 2016 and 2017.
Monetary policy, conducted within an inflation
targeting framework (
20
), has remained highly
accommodative. The ČNB's main policy rate (the
2-week repo rate) has been set at 0.05% since
November 2012. Moreover, in view of projected
undershooting of the inflation target for a
protracted period of time, the ČNB decided in
November 2013 to start using the exchange rate as
an additional instrument for easing monetary
conditions by allowing the koruna exchange rate
against the euro to float freely only on the weaker
side of the 27 CZK/EUR level. Following its
meeting on 5 May 2016, the Bank Board of the
ČNB reiterated that it would not discontinue the
use of the exchange rate as a monetary policy
instrument before 2017.
Wages and labour costs
to 5.1% in 2015, one of the lowest in the EU. At
the same time, the number of employed persons
increased by 0.6% in 2014 and 1.2% in 2015. This
occurred despite falls in the population of working
age and was made possible by an increase in the
participation rate, as more workers were drawn
into the labour market. Nominal wage growth has
accelerated, reaching 2.4% in 2015, while real
wage growth has also turned positive in an
environment of low inflation.
Graph 3.3:
Czech Rep. - Inflation, productivity and wage trends
6
(y-o-y % change)
3
0
-3
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
Source: Eurostat, Commission services' Spring 2016 Forecast.
The labour market has performed strongly since
the economy emerged from recession at the end of
2013. The unemployment rate, which had peaked
at 7% in 2012 and 2013, fell to 6.1% in 2014 and
(
20
) As from January 2010, the inflation target of the ČNB is
set as annual consumer price index growth of 2% (with a
tolerance band of ± 1 percentage point).
Labour productivity sharply accelerated in 2014
and 2015 as the number of persons employed grew
more moderately than real GDP. With labour
productivity growing faster than compensation per
employee, nominal unit labour costs fell in 2015,
after having remained broadly stable in 2014. As a
consequence of lower GDP growth, labour
productivity is also expected to increase at a
slower rate in 2016 and 2017. At the same time,
increasingly tight labour market conditions should
give rise to faster growth of compensation per
employee. As a result, nominal unit labour costs
are expected to increase in 2016 and 2017.
32
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Table 3.2:
Czech Republic - Other inflation and cost indicators
2010
HICP inflation
Czech Republic
Euro area
Private consumption deflator
Czech Republic
Euro area
Czech Republic
Euro area
Labour productivity
Czech Republic
Euro area
Nominal unit labour costs
Czech Republic
Euro area
Imports of goods deflator
Czech Republic
Euro area
1.4
6.0
2.9
7.0
3.8
2.6
0.0
-2.0
1.9
-2.6
0.0
-0.6
0.6
0.6
3.1
1.9
0.6
1.1
0.1
1.0
3.4
2.8
2.2
1.5
-1.3
-0.1
-0.8
0.6
1.4
0.3
0.5
1.6
3.3
2.2
1.6
2.3
2.8
2.2
2.2
1.9
1.7
1.8
0.9
1.1
-0.3
1.7
0.5
0.5
1.5
1.3
1.2
1.6
2.2
2.7
3.5
2.5
1.4
1.3
0.4
0.4
2011
2012
2013
2014
(annual percentage change)
2015
0.3
0.0
0.1
0.2
2.4
1.2
3.0
0.6
-0.5
0.7
-1.9
-3.6
2016
1)
0.5
0.2
0.5
0.4
3.2
1.5
1.7
0.5
1.5
0.9
-2.4
-2.7
2017
1)
1.4
1.4
1.4
1.3
3.6
1.9
2.3
0.8
1.3
1.1
1.3
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
External factors
Given the size and openness of the Czech
economy, import prices have a sizeable effect on
domestic price formation. This has particularly
been the case in recent years, when there have
been significant negative price shocks in global
commodity
markets.
Developments
were,
however, quite mixed across categories of
imported goods with the price of oil falling in
koruna terms and contributing to falling energy
prices in the domestic economy while prices of
other energy goods increased.
The exchange rate provided an inflationary
impulse to domestic price developments in 2014,
with the nominal effective exchange rate
(measured against a group of 36 trading partners)
weaker by more than 5%. As a result, Czech
import prices increased by 1.9% compared to a fall
of 2.6% in the euro area. Developments in the
exchange rate had only a moderate impact on
inflation in 2015 as the koruna's nominal effective
exchange rate remained on average close to its
2014 level.
Administered prices and taxes
in 2015. It stood at 11% in 2015 (
21
), compared to
13% in the euro area. Changes in administered
prices were not a significant driver of inflation in
2014 and 2015, with growth rates broadly in line
with those of headline HICP inflation. Falling
retail energy prices and the abolition of regulatory
fees in the healthcare sector contributed to weak
growth in administered prices in these years. Tax
changes had a marginally positive impact on HICP
inflation in 2014 and 2015.
Medium-term prospects
Annual HICP inflation is expected to remain
subdued in 2016 as the decline in oil and food
prices during the second half of 2015 will continue
to exert a dampening impact on the year-on-year
rate. At the same time, domestic price pressures
are expected to become stronger, particularly with
regards to services prices. According to the
Commission services' Spring 2016 Forecast,
annual HICP inflation is expected to average 0.5%
in 2016, accelerating in the second half of the year.
This acceleration is expected to continue in 2017,
with HICP inflation forecasted to average 1.4%.
(
21
) According to the Eurostat definition, administered prices in
the Czech Republic include
inter alia
heat energy, public
transport, pharmaceuticals, medical and social services. For
details,
see:
http://ec.europa.eu/eurostat/documents/272892/272989/HI
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
The share of administered prices in the HICP
basket has been on a generally declining trend in
recent years, although there was a slight increase
33
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Risks to the inflation outlook are broadly balanced.
The main downside risks relate to weaker-than-
expected economic activity which could stem from
a slowdown in external demand. On the upside,
faster-than-expected growth in domestic wages
could give rise to inflationary demand pressures.
The level of consumer prices in the Czech
Republic dropped to below 63% of the euro-area
average in 2014, with the relative price gap widest
for services. This suggests there is potential for
further price level convergence in the long term.
After having basically stagnated between 2007
until 2013, Czech GDP per capital in purchasing
power standards increased by almost 2 percentage
points to above 79% of the euro-area average in
2014.
Medium-term inflation prospects will be affected
by productivity and wage developments as well as
the functioning of product markets. Given the
openness of the Czech economy and its limited
resource base, commodity prices and other
external price shocks will continue to exercise
significant influence on domestic inflation.
The debt-to-GDP ratio declined from its peak of
45.1% of GDP in 2013 to 41.1% of GDP in 2015,
remaining well below the 60% threshold. The fall
was mainly induced by a favourable stock-flow
adjustment, reflecting better liquidity management.
3.3.2. Medium-term prospects
According to the Commission services' Spring
2016 Forecast, the headline deficit is projected to
increase to 0.7% of GDP in 2016, largely as a
result of fading one-off factors and stabilisation of
tax revenues in line with lower economic growth.
The revenue-to-GDP ratio is expected to drop to
40.7% while the expenditure-to-GDP ratio is set to
fall to 41.4%, as co-financing of EU-funded
investment should decline due to lower expected
drawdown of EU funds in the new programming
period. The structural balance is set to deteriorate
somewhat in 2016.
The headline deficit is expected to decline
marginally to 0.6% of GDP in 2017 due to the
continued improvement in economic performance.
The structural deficit should, however, further
worsen to almost 1% of GDP. The debt-to-GDP
ratio is projected to fall to 40.9% of GDP in 2017.
The 2016 Convergence Programme was submitted
by the Czech authorities on 11 May 2016. The
authorities expect the headline deficit to decline to
0.6% of GDP in 2016 and then to stabilise at 0.5%
of GDP beyond. The Czech Republic over-
achieved its medium-term budgetary objective, set
as a structural deficit of 1 % of GDP, which
continues to be met over the programme horizon.
According to the convergence programme, the
government debt-to-GDP ratio is expected to
remain at 41.1% in 2016 and to fall to 39.3% in
2019. Based on its assessment of the convergence
programme and taking into account the
Commission services' Spring 2016 Forecast, the
Commission is of the opinion that the Czech
Republic is expected to comply with the provisions
of the Stability and Growth Pact. Further details
can be found in the Assessment of the 2016
Convergence Programme for the Czech
Republic (
23
).
3.3.
PUBLIC FINANCES
3.3.1. Recent fiscal developments
On 17 June 2014, the Council decided to abrogate
the decision on the existence of an excessive
deficit according to Article 126 (12) TFEU,
thereby closing the excessive deficit procedure for
the Czech Republic (
22
). The general government
deficit declined substantially from 1.9 % of GDP
in 2014 to 0.4% of GDP in 2015. Total revenue-
to-GDP ratio increased to 42.2% of GDP in 2015,
up from 40.8% in 2014, while total expenditure-to-
GDP remained broadly stable at 42.6% of GDP in
2015, compared to 42.8 % in 2014.
The 2015 headline deficit outcome is well below
the target of 1.9 % of GDP in the 2015
Convergence Programme. This significantly
better-than-expected outcome was due to several
temporary factors including an exceptionally high
absorption rate of EU funds, which boosted GDP
growth. The structural balance improved in 2015
on the back of a rapidly closing negative output
gap.
(
22
) An overview of all excessive deficit procedures can be
found at: http://ec.europa.eu/economy_finance/economic_
governance/sgp/deficit/index_en.htm
(
23
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
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Table 3.3:
Czech Republic - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ recalculated structural balance on the basis of the information in the programme. One-off and other
temporary measures in the convergence programme of April 2016 are -0.2% of GDP in 2015, deficit-increasing;
and 0.0% of GDP in both 2016 and 2017.
Sources: Commission services, the 2016 Convergence Programme of Czech Republic.
2)
1)
(as % of GDP unless indicated otherwise)
2014
-1.9
40.8
42.8
1.3
34.4
-0.6
-1.0
-0.2
-0.8
42.7
2.0
-2.2
2015
-0.4
42.2
42.6
1.1
35.0
0.7
-0.4
0.0
-0.4
41.1
4.2
0.0
2016
-0.7
40.7
41.4
1.0
35.1
0.3
-0.8
0.0
-0.7
41.3
2.1
0.2
2016
-0.6
-0.5
41.1
2.5
2017
-0.6
40.7
41.3
1.0
35.2
0.4
-0.9
0.0
-0.9
40.9
2.6
0.7
2017
-0.5
-0.7
40.7
2.6
2018
-0.5
-0.6
40.2
2.4
2019
-0.5
-0.2
39.3
2.4
-1.3
41.6
42.8
1.3
35.1
0.1
-0.1
-0.1
0.0
45.1
-0.5
-2.8
2010
-4.4
38.6
43.0
1.3
32.6
-3.1
-3.9
0.2
-4.0
38.2
2.3
-1.2
2011
-2.7
40.4
43.2
1.3
33.9
-1.4
-2.6
0.0
-2.6
39.9
2.0
-0.3
2012
-3.9
40.7
44.7
1.4
34.4
-2.5
-3.2
-1.8
-1.5
44.7
-0.9
-1.6
2013
General government balance
As far as the national fiscal framework is
concerned – which refers to numerical fiscal rules,
medium-term budgetary frameworks, independent
fiscal institutions, and budgetary procedures – the
Czech Republic scores low compared to other EU
Member
States.
Medium-term
budgetary
framework and expenditure ceilings exist but
enforcement and monitoring is weak. The draft
reform package aimed at strengthening the
framework was revamped several times. This
package is also meant to complete the
transposition of the Directive on national
budgetary frameworks (
24
) into Czech legislation,
which Member States were obliged to carry out by
the end of 2013. Its latest version was approved by
the government in February 2015 but still awaits
adoption by the parliament.
with a floating exchange rate regime, allowing for
foreign exchange market interventions by the
central bank. The exchange rate of the koruna
against the euro remained broadly stable between
early 2010 until late 2013, oscillating between 24
and 26 CZK/EUR.
On 7 November 2013, the ČNB began using the
exchange rate as an additional instrument for
easing monetary conditions in view of projected
price developments indicating an undershooting of
the inflation target for a protracted period of time.
The ČNB announced that it would intervene on the
foreign exchange market to weaken the koruna, so
that its exchange rate against the euro was close to
27, and clarified that it regarded this commitment
as one-sided, allowing the exchange rate to float
freely on the weaker side of this level. The
announcement and initial market interventions
proved to be effective as the koruna swiftly
weakened from below 26 CZK/EUR to above 27
CZK/EUR.
The koruna traded on average at around 27.5
CZK/EUR throughout 2014 and the first half of
2015, amid low volatility. It strengthened close to
27 CZK/EUR in mid-2015 and then remained near
3.4.
EXCHANGE RATE STABILITY
The Czech koruna does not participate in ERM II.
Since the late 1990s, the ČNB has been operating
an explicit inflation targeting framework combined
(
24
) Council Directive 2011/85/EU of 8 November 2011 on
requirements for budgetary framework of the Member
States
35
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its lower bound set be the ČNB during the second
half of 2015 and in early 2016. During the two
years before this assessment, the koruna
appreciated against the euro by some 1.6%.
Graph 3.4:
Czech Republic - CZK/EUR exchange rate
(monthly averages)
30
ECB asset purchase programmes. The widening
trend accelerated in late 2015 and early 2016,
following further ECB deposit facility rate cuts. At
the cut-off date of this report, the 3-month spread
vis-à-vis the euro area was some 54 basis points.
3.5.
LONG-TERM INTEREST RATES
28
26
24
Long-term interest rates in
used for the convergence
secondary market yields
government bonds with a
about 10 years.
the Czech Republic
examination reflect
on a basket of
residual maturity of
22
20
2010
2011
2012
2013
2014
2015
2016
Source: ECB.
International reserves held by the ČNB increased
by more than EUR 8 billion to above EUR 40
billion (27% of GDP) in late 2013, largely as a
result of its foreign exchange market interventions.
They continued to increase gradually over the next
two years, with the pace of reserve accumulation
accelerating considerably in the second half of
2015. As a result, they reached almost EUR 60
billion by end-2015 (36% of GDP).
Graph 3.5:
Czech Republic - 3-M Pribor spread to 3-M Euribor
(basis points, monthly values)
100
The Czech 12-month average long-term interest
rate relevant for the assessment of the Treaty
criterion was well below the reference value at the
time of the last convergence assessment of the
Czech Republic in 2014. It remained broadly
stable at just above 2% in the first half of 2014 and
then declined gradually to below 0.6% by end-
2015. In April 2016, the latest month for which
data are available, the reference value, given by the
average of long-term interest rates in Bulgaria,
Slovenia and Spain plus 2 percentage points, stood
at 4%. In that month, the 12-month moving
average of the yield on the Czech benchmark bond
stood at 0.6%, i.e. 3.4 percentage points below the
reference value.
Graph 3.6:
Czech Republic - Long-term interest rate criterion
(percent, 12-month moving average)
10
50
8
6
0
4
2
-50
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat.
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Czech Republic
Reference value
The 3-month interest rate differential vis-à-vis the
euro area tightened to below 10 basis points in
early 2014 as a result of koruna liquidity injections
related to the ČNB's foreign exchange market
interventions combined with declining excess
liquidity in the euro area. It widened again to
above 10 basis points in June 2014 and above 20
basis points in September 2014 following the ECB
deposit facility rate cuts. It then continued to
widen gradually throughout late 2014 and 2015 as
excess liquidity in the euro area increased through
Source: Commission services.
Long-term interest rates in the Czech Republic
followed a downward trend from early 2014 up to
April 2015, declining from above 2.4% to below
0.3%, mainly thanks to strong investment demand.
As a result, the spread against the German long-
term benchmark bond narrowed from some 70
basis points to about 10 basis points over this time
period. Long-term interest rates jumped to above
1% in June 2015, largely mirroring the bond
market correction in the euro area, but then
36
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declined again gradually throughout the second
half of 2015. The spread against the German
benchmark bond oscillated at around 25 basis
points in early 2016 (
25
).
Graph 3.7:
Czech Republic - Long-term interest rates
(percent, monthly values)
6
below 1% of GDP in 2014 to above 3% of GDP in
2015. The improvement reflected higher surpluses
in both the current and capital accounts. The
current account surplus increased from 0.2% of
GDP in 2014 to 0.9% of GDP in 2015, due to an
increase in the income balance. The higher capital
account surplus largely reflected a substantial
drawdown of funds from the EU budget.
However, according to the national accounts data,
gross capital formation has actually increased at a
faster pace than savings since 2013, giving rise to a
more negative savings-investment balance. This
increase was largely driven by the general
government sector as public investment increased
significantly in 2014 and 2015. In contrast, gross
capital formation by the household and corporate
sectors fell over this period and the savings-
investment gap of the private sector as a whole
improved.
Graph 3.8:
Czech Republic - Saving and investment
(in percent of GDP at market prices)
4
2
0
2010
Source: Eurostat.
2011
2012
2013
2014
Germany
2015
2016
Czech Republic
3.6.
ADDITIONAL FACTORS
30
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product and financial market
integration – gives an important indication of a
Member State's ability to integrate into the euro
area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
26
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that that the Czech Republic
exceeded the indicative threshold in one out of
fourteen indicators, i.e. the net international
investment position. In line with the conclusions of
the AMRs 2012-16, the Czech Republic has not
been subject to in-depth reviews in the context of
the MIP.
3.6.1. Developments
payments
of
the
balance
of
20
10
0
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
According to the balance of payments data, the
Czech Republic's external balance (i.e. the
combined current and capital account) remained in
surplus over the last two years, increasing from
(
25
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
(
26
) http://ec.europa.eu/europe2020/pdf/2016/ags2016_alert_
mechanism_report.pdf
Export performance improved significantly in
2014, reflecting a sharp depreciation of the
nominal effective exchange rate in late 2013 and
stronger external demand as the euro area emerged
from recession. Export growth remained buoyant
in 2015 but slowed down somewhat compared to
the previous year. External price and cost
competitiveness, as measured by ULC- and HICP-
deflated real effective exchange rates, improved
considerably in late 2013 and, to a lesser degree,
throughout 2014. The real effective exchange rate
then increased somewhat in the course of 2015 as a
result of the nominal effective exchange rate
appreciation.
The financial account balance remained positive in
2014 and 2015, increasing quite sharply in 2015.
This increase was largely driven by rising official
reserves, as the pace of external asset accumulation
by the ČNB accelerated in the second half of 2015.
The contribution of net FDI flows also increased
while net portfolio investment flows contributed
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Table 3.4:
Czech Republic - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
-2.1
1.9
2.0
-5.6
-0.5
0.3
-1.8
-1.9
-1.1
-0.1
-0.2
-0.4
-1.4
-0.1
27.0
22.5
54.8
-45.3
2012
-1.6
3.1
1.9
-5.9
-0.7
1.3
-0.3
0.3
-3.0
-1.4
2.7
2.0
-1.7
0.5
26.3
24.1
60.2
-46.1
2013
-0.5
4.1
1.7
-6.1
-0.3
2.0
1.5
1.7
0.2
-2.3
-0.7
4.5
-2.8
0.2
24.8
23.6
63.5
-41.6
2014
0.2
5.2
1.3
-6.1
-0.2
0.8
0.9
1.5
-1.9
2.1
-0.5
1.7
-0.2
0.5
25.3
23.3
68.6
-37.0
2015
0.9
4.7
1.7
-5.5
0.0
2.4
3.3
4.3
0.6
-3.7
-0.5
7.9
-3.6
1.0
26.7
24.6
70.7
-31.2
-3.7
1.0
2.0
-6.4
-0.3
1.0
-2.7
-3.2
-2.4
-3.8
2.0
1.1
-4.2
-0.5
27.2
22.0
55.2
-46.1
of which: Direct investment
Portfolio investment
Other investment
3)
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, Czech National Bank.
negatively in 2015. Although gross external debt
increased gradually to almost 71% of GDP in
2015, the net international investment position
continued to improve.
Graph 3.9:
Czech Republic - Effective exchange rates
120
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
3.6.2. Market integration
110
100
The Czech economy is highly integrated with the
euro area through trade and investment linkages.
Trade openness of the Czech Republic remains
very high. It has continued to increase in recent
years, reaching almost 94% of GDP in 2015. The
share of trade with the euro area expressed in
percentage of GDP is high and has also been
further increasing in recent years, exceeding 57%
in 2015 as neighbouring euro-area countries
belong to the Czech Republic's largest trade
partners.
The Czech Republic has attracted a high share of
FDI in the tradable sector thanks to its
geographical proximity to EU core markets,
relatively good infrastructure and highly educated
labour force. FDI inflows mainly originate in the
euro area, with the Netherlands, Germany, and
Austria accounting for more than half of the total
stock.
90
80
2010
2011
NEER
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
According to the Commission services' Spring
2016 Forecast, the trade balance is expected to
improve in 2016 and 2017, contributing to further
improvement in the current account balance. The
risks to this outlook are, however, tilted to the
downside, as lower than expected world demand
could give rise to a weaker trade performance.
38
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Table 3.5:
Czech Republic - Market integration
2010
Trade openness
1)
2011
79,1
49,2
3,2
64
38
1,9
98,4
3,7
2012
83,1
50,8
2,9
65
39
0,2
94,9
3,7
2013
84,2
51,5
-1,4
75
46
0,4
94,1
3,3
2014
91,7
56,3
5,2
33
37
0,3
95,9
3,2
2015
93,9
57,7
3,1
36
31
0,5
99,6
3,2
(%)
4)
72,2
45,2
3,3
70
36
1.2
100,0
4,1
6)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
As far as the business environment is concerned,
the scores received by the Czech Republic in
international rankings have improved in recent
years, converging close to the euro-area average.
At the same time, the Czech Republic's deficit in
the transposition of EU directives was just 0,5% in
2015.
Protection of permanent employees against
collective and individual dismissals is relatively
strict (as measured by the 2013 OECD
employment protection indicator). Cross-border
migration flows have remained relatively subdued
although net immigration into the Czech Republic
seems to have picked up somewhat recently.
The Czech financial sector remains highly
integrated into the EU financial sector. The main
channel of integration is through a high degree of
foreign ownership of financial intermediaries as
about 87% of banking sector's assets was in 2014
held by foreign institutions via local branches and
subsidiaries. Bank concentration, as measured by
the market share of the largest five credit
institutions in total assets, has remained above the
euro-area average over the past years at just above
60%.
Graph 3.10:
Czech Republic - Foreign ownership and concentration
in the banking sector
100
90
80
70
60
50
40
30
20
10
0
(in percent, weighted averages)
CZ, 2010
CZ, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
Source: ECB, Structural financial indicators.
The Czech banking sector is well capitalised with
the average capital adequacy ratio of 16.7% in the
third quarter of 2015, similar to 16.2% in the euro
area. Moreover, its profitability has held up
remarkably well in recent years, with the average
return on equity (RoE) reaching almost 10% in
Q3-2015, compared to about 4% in the euro area.
At the same time, the share of non-performing
loans has remained broadly stable at around 5�½%
while it exceeded 6% in the euro area.
After having followed a declining trend between
end-2008 and end-2013, the real house price index
started recovering again in 2014 and it exceeded its
2010 level by end-2015. However, the GDP share
of residential investment remained quite stable in
recent years even though bank lending to
households for house purchase expanded by some
14% between end-2013 and end-2015.
39
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Chapter 3 - Czech Republic
18
16
14
12
10
8
6
4
2
0
Graph 3.11:
Czech Republic - Selected banking sector
soundness indicators
%
CZ, 2010
Return on equity
CZ, Q3-15
EA, 2010
EA, Q3-15
Capital adequacy
Non performing loans
Source: ECB, IMF, EC calculations.
The financial system in the Czech Republic is
smaller relative to GDP than that of the euro area.
Outstanding bank credit to non-financial
companies and households reached 51% of Czech
GDP in 2015, compared to 92% in the euro area.
The stock of quoted shares issued by Czech
enterprises declined to below 15% of GDP in 2015
from above 20% of GDP in 2010. It was thus far
below the euro-area level of 60% of GDP. The
total amount of outstanding debt securities
increased from 54% of GDP in 2010 to 63% of
GDP in 2015, while it exceeded 150% of GDP in
the euro area. The consolidated stock of private
sector debt increased from 68% of GDP in 2010 to
almost 73% of GDP in 2014, remaining
significantly below the euro-area average of 138%.
Graph 3.12:
Czech Republic - Recent development of the
financial system relative to the euro area
180
(in percentage of GDP)
160
140
120
100
80
60
40
20
0
CZ, 2010
CZ, 2015
EA, 2010
EA, 2015
Debt securities
Credit to non-financial corporations
Stock market capitalisation
Credit to households
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
40
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4.
4.1.
CROATIA
4.1.4. Integration in the ESCB
LEGAL COMPATIBILITY
Objectives
4.1.1. Introduction
The main legal rules governing the Croatian
National Bank (Hrvatska narodna banka – HNB)
are laid down in Article 53 of the Constitution of
the Republic of Croatia (
27
) and the Act on the
Croatian National Bank (the HNB Act) (
28
). The
HNB Act was amended in 2013 with a view to
Croatia entering the European Union on 1 July
2013. The Act provides for specific rules applying
to the HNB as of EU accession of Croatia and a
specific chapter for rules applying to the HNB as
of the moment the euro becomes the official
currency of the Republic.
4.1.2. Central Bank independence
The objectives of the HNB are laid down in
Articles 3 and 72 of the HNB Act and are fully
compatible with the objectives applying to the
European System of Central Banks pursuant to
Article 127 of the TFEU.
Tasks
The principle of independence of the HNB is laid
down in Article 53 of the Constitution and in
Articles 2 (2) and 71 of the HNB Act. Article 71 of
the HNB Act contains a specific reference to the
principle of central bank independence as
enshrined in the TFEU, stating that the HNB shall
be independent in achieving its objective and
carrying out its tasks under the Act in accordance
with Article 130 of the TFEU. As regards the rules
on a possible removal of the HNB Governor from
office, Article 81 of the HNB Act makes a specific
reference to the relevant wording of Article 14.2 of
the ESCB/ECB Statute.
No incompatibilities and imperfections exist in this
area.
4.1.3. Prohibition of monetary financing and
privileged access
The provisions under chapter VIII of the HNB Act
define the tasks the HNB has to carry out as
integral part of the European System of Central
Banks pursuant to the rules of the TFEU and the
ESCB/ECB Statute. No incompatibilities exist
with regard to these tasks. The Commission
understands that the competence of the HNB
Council to decide on the HNB's membership in
international institutions pursuant to Article 104
(11) of the HNB Act is without prejudice to the
ECB's powers in the field of international
cooperation involving tasks entrusted to the ESCB
under Article 6.1 of the ESCB/ECB Statute.
4.1.5. Assessment of compatibility
The Constitution and the Act on the Croatian
National Bank are fully compatible with Articles
130 and 131 of the TFEU. This assessment is
without prejudice to an analysis of the potential
changes to the HNB Act on the basis of a draft law
which is pending in the Croatian Parliament at the
moment of writing the 2016 Convergence Report.
4.2.
PRICE STABILITY
4.2.1. Respect of the reference value
No incompatibilities and imperfections exist in this
area. The rules on prohibition of lending to the
public sector pursuant to Article 78 of the HNB
Act include a specific reference to the prohibition
of monetary financing as laid down in Article 123
of the TFEU.
(
27
) Constitution as amended and published in the Official
Journal of the Republic of Croatia no. 56/90, 135/97,
113/2000, 123/2000, 124/2000, 28/2001, 55/2001 and
76/2010.
(
28
) Official Journal of the Republic of Croatia no. 75/2008 and
54/2013.
The 12-month average inflation rate, which is used
for the convergence assessment, was below the
reference value at the time of the 2014
convergence assessment of Croatia. It declined
gradually throughout 2014 to around 0.1% in early
2015 and dropped into negative territory in the
second half of 2015. In April 2016, the reference
value was 0.7%, calculated as the average of the
12-month average inflation rates in Bulgaria,
Slovenia and Spain plus 1.5 percentage points. The
corresponding inflation rate in the Croatia
41
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Chapter 4 - Croatia
was -0.4%, i.e. 1.1 percentage points below the
reference value. The 12-month average inflation
rate is projected to fall well below the reference
value in the months ahead.
Graph 4.1:
Croatia - Inflation criterion since 2010
(percent, 12-month moving average)
5
4
3
2
1
0
-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Croatia
Reference value
processed food prices also increased at a slower
pace than in preceding years. Prices of services,
which account for about a third of the HICP
basket, thus became the main driver of core
inflation in 2014 and 2015. Industrial producer
prices continued to decline throughout 2014 and
2015.
4.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
4.2.2. Recent inflation developments
After having temporarily exhibited negative
growth rates in early 2014, annual HICP inflation
in Croatia averaged 0.2% in 2014 as declining
prices of non-energy industrial goods and
unprocessed food dampened growth of the
headline rate. The inflation rate dropped again into
negative territory in December 2014 and then
remained negative throughout most of 2015 due to
rapidly falling energy prices. HICP inflation thus
averaged -0.3% in 2015. It declined further in early
2016 and stood at -0.9% in April 2016.
Graph 4.2:
Croatia - HICP inflation
(y-o-y percentage change)
6
The pace of economic contraction slowed in 2014
with real GDP declining by some 0.4%. After six
years in recession, the Croatian economy finally
expanded again in 2015 as real GDP increased by
1.6 %. The recovery was mainly driven by
domestic demand which was supported by falling
energy prices, a stabilising labour market and a
reformed personal income tax regime. The related
pick-up in import growth offset continued export
acceleration and thus led to a reduction in the
growth contribution of net exports. Real GDP
growth is expected to accelerate to about 1.8% in
2016 and 2.1% in 2017, driven by domestic
demand, with investment growth partly spurred by
EU funds. As a result, the negative output gap is
estimated to almost fully close by 2017.
The fiscal stance, as measured by the change in the
structural balance, was loosened slightly in 2014.
It was then tightened considerably in 2015, largely
on the back of a sizeable drop in public
investment. The structural deficit is thus estimated
to have dropped to below 2% of GDP in 2015. In
view of the gradually closing output gap, the fiscal
stance is projected to be mildly expansionary in
2016 and 2017.
The HNB has continued to pursue an
accommodative monetary policy by preserving
high levels of liquidity in the monetary system in
order to ease domestic financing conditions while
simultaneously maintaining a broadly stable
exchange rate of the kuna against the euro.
However, the high degree of euroisation constrains
the scope of domestic monetary policy, while its
effectiveness is also limited by the shallow
domestic money market and relatively high
concentration in the banking sector.
4
2
0
-2
2010
2011
2012
Croatia
2013
2014
2015
Euro area
Source: Eurostat.
Core inflation (measured as HICP inflation
excluding energy and unprocessed food)
decelerated sharply from 2.1% in 2013 to 0.6 % in
2014. It then broadly stabilised at 0.8% in 2015
and at around 0.7% in early 2016. The decline
reflected a contraction and subsequent stabilisation
of non-energy industrial goods prices while
42
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Convergence Report 2016 - Technical annex
Chapter 4 - Croatia
Table 4.1:
Croatia - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
1.1
-0.6
9.9
-2.2
0.1
1.6
0.3
0.6
4.3
2011
2.2
-0.2
7.0
1.5
5.6
-0.1
1.5
2.1
1.4
2012
3.4
1.2
10.8
5.5
2.7
0.7
1.6
2.5
7.6
2013
2.3
-0.1
1.8
4.5
5.3
1.6
2.1
1.9
3.4
2014
0.2
-1.1
0.7
-3.6
0.9
1.7
0.6
-0.6
1.7
(percentage change)
1)
2015
-0.3
0.1
-5.9
0.8
0.6
1.4
0.8
-0.6
0.4
Apr-16
-0.4
0.3
-6.3
-0.6
0.6
1.2
0.8
-0.7
0.2
weights
in total
2016
1000
267
108
82
201
343
811
1000
151
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
Wages and labour costs
The labour market situation started improving in
2015. After having stagnated in 2014, the
unemployment rate declined close to 16% in 2015
while employment continued increasing. This was,
however, not yet reflected in nominal wage
developments as wages continued to decline in
2015.
Nominal compensation per employee contracted
significantly in 2014. As a result, despite the
parallel drop in labour productivity, nominal unit
labour
costs
(ULC)
declined.
Nominal
compensation per employee decreased also in 2015
while labour productivity stabilised, resulting in a
further reduction in nominal ULC. As continued
labour market recovery should result in positive
wage growth, nominal ULC are expected to
increase in 2016 and 2017.
Graph 4.3:
Croatia - Inflation, productivity and wage trends
8
(y-o-y % change)
collapse registered in the aftermath of the global
financial crisis, reaching about 47% of GDP in
2015. Import prices (measured by the imports of
goods deflator) declined by some 1% in 2014 and
1.4% in 2015, largely as a result of lower prices of
imported commodities.
The nominal effective exchange rate (measured
against a group of 36 trading partners) depreciated
somewhat in the second half of 2014 and in early
2015. It subsequently recovered a part of its losses
and then remained broadly stable up to early 2016.
The exchange rate thus did not provide a
substantial inflationary impulse to domestic price
developments over the last two years.
Administered prices and taxes
4
0
-4
-8
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
Administered prices represent almost 20% of the
HICP basket (
29
), compared to about 13% in the
euro area. Increases of administered prices have
contributed positively to inflation in recent years,
despite having followed a downward trend. Their
subdued growth in 2014 and 2015 mainly reflected
significant increases in prices of water supply and
sewerage collection as well as hospital and postal
services, which were partly offset by falling
electricity and later also gas prices.
Tax changes provided a significant positive
contribution to HICP inflation in 2014. This was
due to the increase in the lower VAT rate from
10% to 13%, higher excise taxes on tobacco and
(
29
) According to the Eurostat definition, administered prices in
Croatia include
inter alia
water supply, refuse and
sewerage collection, electricity, gas and heat energy as well
as dental, hospital and postal services. For details, see:
http://ec.europa.eu/eurostat/documents/272892/272989/HI
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
HICP inflation
Source: Eurostat, Commission services' Spring 2016 Forecast.
External factors
External factors have a significant impact on
domestic price dynamics. The ratio of imports to
GDP has been constantly increasing since the
43
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Table 4.2:
Croatia - Other inflation and cost indicators
2010
HICP inflation
Croatia
Euro area
Private consumption deflator
Croatia
Euro area
Croatia
Euro area
Labour productivity
Croatia
Euro area
Nominal unit labour costs
Croatia
Euro area
Imports of goods deflator
Croatia
Euro area
1.4
6.0
6.3
7.0
2.9
2.6
-0.4
-2.0
-1.0
-2.6
0.1
-0.6
0.6
0.6
-1.3
1.9
-2.2
1.1
-2.4
1.0
2.1
2.8
3.7
1.5
1.5
-0.1
1.5
0.6
-2.8
0.3
1.5
1.6
2.2
2.2
2.4
2.3
4.2
2.2
3.2
1.9
0.2
1.8
1.9
1.1
-0.7
1.7
-0.4
0.5
-5.2
1.3
1.1
1.6
2.2
2.7
3.4
2.5
2.3
1.3
0.2
0.4
2011
2012
2013
2014
(annual percentage change)
2015
-0.3
0.0
-0.5
0.2
-0.5
1.2
0.0
0.6
-0.5
0.7
-1.4
-3.6
2016
1)
-0.6
0.2
-0.5
0.4
1.1
1.5
0.7
0.5
0.4
0.9
-0.8
-2.7
2017
1)
0.7
1.4
0.7
1.3
1.6
1.9
0.7
0.8
0.9
1.1
0.4
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
refined petroleum products as well as the
introduction of fiscal levies on mobile services. A
more modest inflationary impact of tax changes in
2015 was largely related to further excise tax
hikes.
Medium-term prospects
level convergence in the long term. However,
Croatian GDP per capita in purchasing power
standards has stagnated at around 55% of the euro-
area average in recent years.
Medium-term inflation prospects will be affected
by productivity and wage developments as well as
the extent of spare capacity in the economy. The
rebalancing of the economy towards the external
sector is expected to continue as Croatia deepens
its integration in the EU value chains. With
continued economic recovery, it will be crucial to
ensure that wages increase in line with
productivity growth.
According to the Commission services' Spring
2016 Forecast, annual HICP inflation is projected
to remain negative throughout 2016 mainly as a
result of falling energy prices, including a sharp
reduction of administered gas tariffs as of April
2016. Annual inflation is expected to turn positive
in 2017 as the negative impact of lower energy
prices fades out while continued economic
expansion should support consumer price growth.
Annual HICP inflation is thus forecasted to
average -0.6% in 2016 and 0.7% in 2017.
Risks to the inflation outlook are broadly balanced.
A slower-than-expected GDP expansion, possibly
induced by a less favourable external environment,
would further limit inflationary pressures. On the
other hand, higher-than-expected increases in some
administered prices could contribute positively to
inflation developments.
The level of consumer prices in Croatia declined to
close to 65% of the euro-area average in 2014.
This suggests there is potential for further price
4.3.
PUBLIC FINANCES
4.3.1. The excessive deficit procedure for
Croatia
On 28 January 2014, the European Council
decided that an excessive deficit existed in Croatia
in accordance with Article 126(6) of the Treaty on
the Functioning of the European Union (TFEU).
The Council issued a recommendation to Croatia
in accordance with Article 126(7) TFEU with a
view to bringing to an end the situation of an
excessive deficit by 2016. In particular, the
Council recommended to the Croatian authorities
to gradually reduce the general government deficit
44
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Convergence Report 2016 - Technical annex
Chapter 4 - Croatia
Table 4.3:
Croatia - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ calculations on the basis of the information in the programme.
There are no one-off and other temporary measures in the programme.
Sources: Commission services, the 2016 Convergence Programme of Croatia.
2)
1)
(as % of GDP unless indicated otherwise)
2013
-5.3
42.5
47.8
3.5
36.4
-1.8
-3.6
-0.2
-3.3
82.2
-1.1
-3.7
2014
-5.5
42.6
48.1
3.5
36.5
-2.0
-3.6
-0.1
-3.5
86.5
-0.4
-4.0
2015
-3.2
43.7
46.9
3.6
37.2
0.4
-1.8
-0.1
-1.7
86.7
1.6
-2.9
2016
-2.7
44.1
46.8
3.6
37.2
0.9
-1.9
0.0
-1.9
87.6
1.8
-1.7
2016
-2.6
-1.7
85.9
2.0
2017
-2.3
44.4
46.6
3.6
37.4
1.3
-2.1
0.0
-2.1
87.3
2.1
-0.3
2017
-2.0
-1.6
84.7
2.1
2018
-1.6
-1.7
82.8
2.3
2019
-1.0
-1.6
80.0
2.5
2010
-6.2
41.3
47.5
2.6
36.1
-3.6
-5.5
0.0
-5.5
58.3
-1.7
-1.4
2011
-7.8
41.0
48.8
3.0
35.2
-4.8
-7.3
0.0
-7.3
65.2
-0.3
-1.3
2012
-5.3
41.7
47.0
3.4
35.9
-1.9
-4.0
0.0
-4.0
70.7
-2.2
-2.8
General government balance
to 4.6%, 3.5% and 2.7% of GDP in 2014, 2015,
and 2016, respectively, consistent with an annual
improvement in the structural balance of 0.5%,
0.9% and 0.7% of GDP in the three respective
years. The Commission considered in June 2014
that Croatia had taken effective action and that no
further steps in the excessive deficit procedure
were needed. Since then, the excessive deficit
procedure for Croatia has been held in abeyance.
4.3.2. Recent fiscal developments
The 2015 deficit outcome was well below the
5.0% of GDP targeted in the 2015 Convergence
Programme. The structural balance improved from
some -3.5% of GDP in 2014 to about -1.7% in
2015, after having marginally deteriorated in 2014.
In 2014, general government debt increased by
more than 4 percentage points to 86.5% of GDP,
mostly due to the underlying deficit dynamics. In
2015, the debt-to-GDP ratio increased only slightly
to 86.7% of GDP, reflecting the lower deficit and a
draw-down of government deposits.
4.3.3. Medium-term prospects
The general government deficit declined from
5.5% of GDP in 2014 to 3.2% of GDP in 2015.
The main driver of the sizeable improvement was a
22% drop in public investment. This, together with
a further reduction in public subsidies and the
wage bill, resulted in a 0.8% decrease in general
government expenditure in nominal terms,
bringing the expenditure-to-GDP ratio down to
46.9%. At the same time, revenues grew by a solid
4.4%, mainly on account of strong growth in
indirect taxes. The share of revenues in GDP
increased to 43.7%. The primary balanced turned
to a surplus of 0.4% of GDP in 2015, for the first
time since more than a decade.
Due to the parliamentary elections in November
2015, a temporary financing arrangement was in
place in the first quarter of 2016. The 2016 Budget
Act was adopted by Parliament on 21 March 2016.
The budget does not present ESA-based targets for
the developments in the general government sector
in 2016. The budget does not outline sizeable
measures on the revenue side, apart from an
increase in the supplementary health insurance
premium, but it envisages moderate restraints in
most spending categories.
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The Commission services' Spring 2016 Forecast,
which takes into account the adopted budget,
projects the general government deficit to decline
to 2.7% of GDP in 2016 and further to 2.3% of
GDP in 2017 on a no-policy-change basis. The
structural balance is expected to deteriorate by
about 0.2 pp. both in 2016 and 2017. On the back
of strengthening primary surplus, public debt is
expected to peak at 87.6% of GDP in 2016 and
then to decline slightly in 2017.
The 2016 Convergence Programme was submitted
on 28 April 2016. It confirms the government’s
commitment to reduce the general government
deficit to below 3% of GDP by 2016, as
recommended by the Council. In particular, the
general government deficit is targeted to gradually
decline from 3.2% of GDP in 2015 to 2.6% of
GDP in 2016 and 2.0% of GDP in 2017. The
deficit target for 2016 is broadly in line with the
Commission services' Spring 2016 Forecast. The
deficit target for 2017 is lower than the
Commission projection, largely on account of the
Commission
services'
more
conservative
assessment of the impact of measures presented in
the programme. Based on its assessment of the
convergence programme and taking into account
the Commission services' Spring 2016 forecast, the
Commission is of the opinion that there is a risk
that Croatia will not comply with the provisions of
the Stability and Growth Pact. Therefore, further
measures will be needed to ensure compliance in
2017. Further details can be found in the
Assessment of the 2016 Convergence Programme
for Croatia (
30
).
As far as the fiscal framework is concerned –
which refers to numerical fiscal rules, medium-
term budgetary frameworks, independent fiscal
institutions and budgetary procedures – the
Croatian framework remains relatively weak,
despite improvements in recent years, which
notably materialised in the amendments to the
Budget Act and the adoption of the Fiscal
Responsibility Law. In particular, the multiannual
expenditure framework is one of the least binding
in the European Union: its consistency with annual
budgets (whose allocations are also frequently
revised) is limited, and its expenditure ceilings are
revised without public explanation. In addition, the
budgetary process gives little consideration to the
sizeable off-budget transactions and accounting
(
30
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
adjustments. Finally, the design of the numerical
fiscal rules could be improved, and the
independence of the monitoring body, the Fiscal
Policy Commission, is not yet fully guaranteed.
4.4.
EXCHANGE RATE STABILITY
The Croatian kuna does not participate in ERM II.
The HNB operates a tightly managed floating
exchange rate regime, using the exchange rate as
the main nominal anchor to achieve its primary
objective of price stability. The HNB does not
target a specific level or band for the kuna
exchange rate against the euro but, through its
foreign exchange transactions, it aims to prevent
excessive exchange rate fluctuations.
The kuna's exchange against the euro has remained
broadly stable over the past two years, oscillating
around 7.6 HRK/EUR. It continued to follow an
intra-year pattern of temporarily appreciating in
spring as a result of foreign exchange inflows
generated by the tourism sector.
Graph 4.4:
Croatia - HRK/EUR exchange rate
(monthly averages)
8.0
7.8
7.6
7.4
7.2
7.0
2010
2011
2012
2013
2014
2015
2016
Source: ECB.
International reserves held by the HNB hovered
above EUR 12 billion (29% of GDP) throughout
2014. They increased to above EUR 14 billion in
the first quarter of 2015 but then declined again
and stood at some EUR 13.7 billion (31% of GDP)
by end-2015. They were negatively affected by
losses related to the legislated conversion of CHF-
denominated housing loans into euros which
created a currency mismatch on the banking
sector's balance sheet and thus necessitated an
injection of foreign-exchange liquidity by the HNB
with a negative impact of almost EUR 0.3 billion
on its international reserve level. By end-2015,
international reserves are estimated to have
covered about 140% of Croatia's short-term
external debt and some 36% of broad money (M4).
46
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The HNB does not actively use changes in interest
rates on its lending and deposit facilities as a
monetary policy tool given their weak transmission
in a shallow domestic money market. As a result,
the evolution of short-term rates mainly reflects
changes in kuna liquidity in the monetary system.
The 3-month interest rate differential against the
euro area widened from around 60 basis points in
the first half of 2014 to above 100 basis points in
September 2014 as money market rates declined in
the euro area due to the ECB deposit facility rate
cuts while the domestic benchmark rate Zibor
increased somewhat. The short-term interest
differential remained at around 100 basis points
until September 2015 when the legislated
conversion of CHF-denominated housing loans
resulted in a considerable tightening of money
market conditions in Croatia. Domestic money
market conditions then eased again in late 2015
and early 2016. At the cut-off date of this report,
the 3-months spread vis-à-vis the euro area stood
at some 107 basis points.
Graph 4.5:
Croatia - 3-M Zibor spread to 3-M Euribor
(basis points, monthly values)
500
Graph 4.6:
Croatia - Long-term interest rate criterion
(percent, 12-month moving average)
14
12
10
8
6
4
2
0
Jan-10
Jan-11
Jan-12
Croatia
Jan-13
Jan-14
Jan-15
Jan-16
Reference value
Source: Commission services.
interest rates in Bulgaria, Slovenia and Spain plus
2 percentage points, stood at 4%. In that month,
the 12-month moving average of the yield on the
Croatian benchmark bond stood at 3.7%, i.e. 0.3
percentage points below the reference value.
Graph 4.7:
Croatia - Long-term interest rates
(percent, monthly values)
10
8
6
400
4
300
2
200
100
0
2010
2011
2012
Croatia
2013
2014
Germany
2015
2016
0
-100
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat.
Source: Eurostat.
4.5.
LONG-TERM INTEREST RATES
The long-term interest rate in Croatia used for the
convergence examination reflects the secondary
market yield on a single benchmark government
bond with a residual maturity of close to, but
below, 10 years.
The Croatian 12-month average long-term interest
rate relevant for the assessment of the Treaty
criterion was below the reference value at the time
of the 2014 convergence assessment of Croatia. It
declined gradually from around 4.8% in the first
half of 2014 to below 3.5% in mid-2015, before
increasing slightly in late 2015. In April 2016, the
last month for which data are available, the
reference value, given by the average of long-term
Long-term interest rates in Croatia declined from
above 5% in early 2014 to about 3% in the second
quarter of 2015. This was largely due to favourable
financial market developments in the euro area as
the spread vis-à-vis the German long-term
benchmark bond narrowed to a more limited extent
from above 330 to below 250 basis points over the
same time period. Long-term interest rates then
increased to around 3.9% in the second half of
2015, mainly due to the deterioration in domestic
financial market sentiment, with the spread to the
German benchmark bond widening back to some
340 basis points. In April 2016, the long-term
interest rate stood at 3.6% and the spread vis-à-vis
the German benchmark bond at about 350 basis
points (
31
).
(
31
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
47
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4.6.
ADDITIONAL FACTORS
increased significantly from 1% of GDP in 2014 to
some 5.6% of GDP in 2015.
The improvement in the external balance reflects
the ongoing weakness of investment and residual
deleveraging pressures in the household sector and
among financial corporations which were only
partly offset by the continued high borrowing
needs of the general government. As a result, while
gross capital formation remained below 19% of
GDP in 2014 and 2015, gross national saving
increased from below 20% of GDP in 2014 to
above 23% of GDP in 2015.
Graph 4.8:
Croatia - Saving and investment
(in percent of GDP at market prices)
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product and financial market
integration – gives an important indication of a
Member State's ability to integrate into the euro
area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
32
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Croatia exceeded the
indicative threshold for six out of fourteen
indicators, two in the area of external imbalances
(i.e. the net international investment position and
change in the export market share), two in the area
of internal imbalances (i.e. general government
gross debt and the unemployment rate) and two
new employment indicators (long-term and youth
unemployment). In line with the conclusion of the
AMR 2016, Croatia was subject to an in-depth
review, which found that Croatia continued to
experience excessive macroeconomic imbalances.
Vulnerabilities were linked to high levels of
public, corporate and external debt in a context of
high unemployment.
4.6.1. Developments
payments
of
the
balance
of
30
20
10
0
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
The current account surplus remained broadly
stable at below 1% of GDP in 2014. This masked
an improvement in the balance of trade in goods
and services which was offset by a worsening of
both the primary and the secondary income
balance. In 2015, the current account registered a
record surplus of above 5% of GDP. This reflected
a further improvement in the trade balance and a
higher surplus on the secondary income balance as
well as a large temporary fall in the primary
income deficit, which was mainly related to losses
incurred by the foreign-owned banking sector in
the aftermath of the legislated conversion of CHF
loans. The capital account balance remained close
to zero in 2014 and then increased to 0.4% of GDP
in 2015. Croatia's external surplus (i.e. the
combined current and capital account) thus
(
32
)
http://ec.europa.eu/europe2020/pdf/2016/ags2016_al
ert_mechanism_report.pdf
In 2014 and 2015, export performance was very
good as Croatia swiftly increased its export market
share. Exports were supported by improved cost
and price competitiveness as the ULC- and HICP-
deflated real effective exchange rates depreciated
throughout 2014 before broadly stabilising in
2015. The improvement in the ULC-based REER
was more pronounced than in the case of the
HICP-based REER which continued to move
largely in sync with the NEER.
Graph 4.9:
Croatia - Effective exchange rates
110
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
100
90
80
70
2010
NEER
2011
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
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Table 4.4:
Croatia - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
-0.8
-14.3
13.8
-3.0
2.7
0.1
-0.7
-3.2
-2.5
-1.5
-0.1
0.9
-4.1
-2.4
20.6
20.0
88.8
-91.8
2012
-0.1
-14.3
14.8
-3.4
2.8
0.1
0.0
-0.9
-2.7
-4.0
5.7
0.1
-1.0
-0.9
19.3
19.8
83.2
-90.9
2013
1.0
-15.1
15.5
-2.0
2.6
0.1
1.1
-0.9
-1.9
-4.4
1.2
4.2
-5.1
-2.0
19.1
20.7
82.3
-89.3
2014
0.8
-14.8
16.8
-3.3
2.1
0.2
1.0
-0.2
-3.1
1.7
2.4
-1.2
1.0
-1.3
18.2
19.3
83.6
-88.3
2015
5.2
-15.1
17.9
-0.7
3.1
0.4
5.6
4.6
-0.3
-0.2
3.4
1.7
2.9
-1.0
18.3
23.4
76.8
-79.0
-1.1
-13.2
12.8
-3.1
2.4
0.1
-1.0
-2.9
-2.1
-0.9
-0.2
0.2
-3.1
-2.0
21.4
20.4
n.a.
-95.6
of which: Direct investment
Portfolio investment
Other investment
3)
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, Croatian National Bank.
The financial account posted a marginally negative
balance in 2014 before displaying a substantial
surplus in 2015. The turnaround mainly reflected
the evolution of international reserves held by the
HNB, which increased in 2015, after having
declined in 2014. At the same time, net inflows of
foreign direct investment declined from some 3%
of GDP in 2014 to just 0.3% of GDP in 2015 while
the positive contribution of other investment
increased by about 1 pp. in 2015. On the other
hand, the contribution of portfolio investment
turned negative again in 2015. The net
international investment position (NIIP), which
remained broadly stable at around -88% of GDP in
2014, improved to -79% of GDP by the end of
2015 while gross external debt declined to below
77% of GDP.
According to the Commission services' Spring
2016 Forecast, the external surplus is expected to
contract somewhat in 2016 and 2017.
4.6.2. Market integration
The degree of trade openness increased
considerably in recent years to above 50% of GDP
in 2015 but remains relatively low given the small
size of the Croatian economy. Trade with the euro
area amounted to about 29% of GDP and thus
constituted over half of total trade, with Italy,
Germany and Slovenia as Croatia's largest trade
partners. There, nevertheless, remains significant
room for a deepening of trade integration with the
euro area.
FDI has so far been mainly directed into the
banking, real estate and retail sectors, with the
largest inflows originating from the Netherlands,
Austria and Germany. On the other hand, Croatia
failed to attract significant FDI inflows into the
tradable goods sector and it is thus weakly
integrated into global supply chains. Relatively
high costs and an unfavourable business
environment appear to be the main obstacles to
attracting FDI.
With regard to the business environment, Croatia
performs worse than most euro-area Member
States according to several commonly used
indicators, including the World Bank's Ease of
The Croatian economy is well integrated with the
euro area through trade and investment linkages.
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Table 4.5:
Croatia - Market integration
2010
Trade openness
1)
(%)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
4)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
6)
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
40.2
21.1
-3.8
79
77
n.a.
100.0
n.a.
2011
42.9
21.3
-2.9
80
76
n.a.
97.9
n.a.
2012
43.9
22.1
0.3
84
81
n.a.
93.3
n.a.
2013
44.8
23.8
1.7
89
75
0.6
88.0
n.a.
2014
47.4
26.9
4.0
39
77
0.1
86.9
n.a.
2015
51.1
29.2
5.4
40
77
0.1
84.9
n.a.
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
Doing Business Index and the World Economic
Forum’s Global Competitiveness Index. At the
same time, Croatia's deficit in the transposition of
EU directives was just 0.1% in 2015.
Activity and employment rates are low compared
to the euro-area average, which is partly related to
underlying institutions and policies such as early
retirement schemes, pension eligibility criteria, and
the tax-benefit system. The 2013 and 2014 labour
market reforms have significantly reduced the gap
with other EU economies in terms of employment
protection legislation, with a positive impact on
employment growth but also leading to a
significant increase in the use of temporary
contracts. Inefficient wage determination in the
public sector still hampers government’s control
over the public wage bill and may hinder wage
responsiveness.
Graph 4.10:
Croatia - Foreign ownership and concentration
in the banking sector
100
(in percent, weighted averages)
90
80
70
60
50
40
30
20
10
0
HR, 2010
HR, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
foreign ownership of the banking sector, as around
90% of its assets are held by subsidiaries of
foreign banks. Market concentration is relatively
high, with the largest five banking institutions
accounting for more than 70% of banking sector
assets.
The banking system in Croatia is well capitalized.
In the third quarter of 2015, its capital adequacy
ratio exceeded 18%, compared to 16% in the euro
area. However, the quality of the loan portfolio
deteriorated significantly between 2010 and 2015
as the share of non-performing loans (NPLs)
reached 13% in Q3-2015 while it increased to 6%
in the euro area. Profitability of the banking sector
was negatively affected by the legislated
conversion of CHF loans resulting in a negative
return on equity in Q3-2015, compared to almost
4% return in the euro area.
Graph 4.11:
Croatia - Selected banking sector soundness
indicators
%
20
25
15
10
5
0
-5
-10
HR, 2010
HR, Q3-15
EA, 2010
EA, Q3-15
Return on equity
Capital adequacy
Non performing loans
Source: ECB, Structural financial indicators and HNB Banks Bulletin.
Source: ECB, HNB, EC calculations.
The financial sector in Croatia is highly integrated
into the EU financial sector, in particular through
The real house price index has continued to decline
in recent years, falling to below 85% of its 2010
50
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Convergence Report 2016 - Technical annex
Chapter 4 - Croatia
level by the end of 2015. At the same time, bank
lending to households for house purchase also
declined while construction activity appears to
have remained relatively subdued.
The financial system in Croatia is smaller relative
to GDP than that of the euro area. Outstanding
bank credit to Croatian non-financial corporations
and households amounted to 63% of GDP in 2015,
compared to 92% in the euro area, with the
majority of loans denominated in euro. The stock
of quoted shares issued by Croatian enterprises
stood at below 40% of GDP in 2015 while it
reached 60% of GDP in the euro area. The debt
market, amounting to 62% of GDP in 2015 and
largely dominated by government securities, is
also not very developed relative to the euro area,
where it exceeds 150% of GDP. After having
declined between 2010 and 2013, the GDP share
of consolidated private sector debt increased again
to just above 120% in 2014, remaining below the
euro-area average of 138%.
Graph 4.12:
Croatia - Recent development of the financial
system relative to the euro area
180
(in percentage of GDP)
160
140
120
100
80
60
40
20
0
HR, 2010
HR, 2015
EA, 2010
EA, 2015
Debt securities
Credit to non-financial corporations
Stock market capitalisation
Credit to households
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services, HNB, Zagreb Stock Exchange.
51
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5.
5.1.
HUNGARY
LEGAL COMPATIBILITY
ability to carry out these tasks from an operational
and financial point of view.
Further to this principle, the MNB should be fully
insulated from all financial obligations resulting
from
any
HFSA
activities.
Contractual
relationships in the period prior to 1 October 2013
including, amongst others, all employment
relations between any new MNB staff member and
the former HFSA can be continued only with the
proviso that the continuation does not impinge on
the MNB's independence and its power to fully
carry out its duties under the Treaties. Against this
background, Section 176 and 183 of the MNB Act
have to be aligned to the principle of central bank
independence as enshrined in Article 130 of the
TFEU.
According to Section 9 (7) of the MNB Act, the
Governor and the Deputy Governors shall take an
oath before the President of the Republic and other
members of the Monetary Council before the
Parliament upon taking office with the words
required by Law XXVII of 2008 as amended on
the oath and solemn promise of certain public
officials. The Law requires making an oath with
words "I, (name of the person taking the oath),
hereby make an oath to be faithful to Hungary and
to its Fundamental Law, to comply with its laws,
and make sure others citizens comply with them
too; I will fulfil the duties arising from my position
as a (name of the position) for the benefit of the
Hungarian nation […]". The oath does not contain
a reference to the principle of central bank
independence enshrined in Article 130 TFEU.
What is more, the Fundamental Law contains only
an indirect reference to EU law. Since the
Governor and the Deputy-Governors as members
of the Monetary Council are involved in the
performance of ESCB related tasks, any oath
should make a clear reference to the Central Bank
independence under Article 130 of the TFEU.
Therefore, the oath is an imperfection as regards
the institutional independence of the MNB and the
wording of the oath should be adapted to be fully
in line with Article 130 of the TFEU.
In addition, Section 156(7) read in conjunction
with Section 152(1) of the MNB Act, extends the
application of conflict of interests provisions to
Monetary Council members to six months
following termination of their employment
5.1.1. Introduction
The main rules governing the National Bank of
Hungary (Magyar Nemzeti Bank, hereafter: MNB)
are laid down in Article 41 of the new Hungarian
Fundamental Law and Act CXXXIX 2013 on the
MNB (hereafter: MNB Act). The MNB Act has
been subject to frequent changes including some
recasts over recent years. The currently applicable
MNB Act took effect on 1 October 2013,
providing for the MNB to become responsible for
macro-prudential policy and, further to the
dissolution of the Hungarian Financial Supervisory
Authority, micro-prudential supervision of the
Hungarian financial sector. Since the most recent
convergence exercise of 2014, the MNB Act was
amended at several occasions (
33
).
5.1.2. Central Bank independence
Frequent amendments to the Central Bank Act of a
Member State can create instability in the Central
Bank's operations. Therefore, a stable legal
framework that provides a solid basis for a Central
Bank to function is essential for ensuring central
bank independence.
Pursuant to Section 176 of the MNB Act, the MNB
has become the legal successor of the liabilities of
the former Hungarian Financial Supervisory
Authority (HFSA), which ceased to exist on 1
October 2013. This legal succession also implies
the transfer of all employees from the HFSA to the
MNB pursuant to Section 183 of the MNB Act.
The principle of central bank independence
pursuant to Article 130 of the TFEU implies that
the MNB must have sufficient financial resources
to perform its ESCB and ECB-related tasks, in
addition to its national tasks. The tasks transferred
from the HFSA to the MNB must not affect its
(
33
) The changes relate inter alia to the MNB's resolution
powers, the legal framework regarding the Financial
Stability Board and financial stability measures, rules
regarding the distribution and reproduction of forint and
euro coins and forint and euro medals, the possibility to
provide emergency liquidity assistance to the Investor
Protection Fund, payment transactions, the promotion of
the development and security of the financial intermediary
system, out-of-court dispute settlement for financial
disputes.
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relationship with the MNB. However, an
exemption is granted as regards organisations
covered by acts enumerated in Section 39 in which
the Hungarian State or the MNB has a majority
stake. Such an exemption could create situations
where the privileged position of Monetary Council
members could give them an unfair advantage in
obtaining nominations or posts in other
organisations, putting them in a position of conflict
of interest while still in employment at the MNB.
Moreover, Section 157 of the MNB Act provides
for an obligation for members of the Monetary
Council, including the Governor and the Deputy
Governor, to file declarations of wealth in the
same manner as Members of Parliament, pursuant
to the provisions of Section 90 of the Law XXXVI
of 2012 on the Parliament. According to Section
157(1) of the MNB Act and Section 90(2) of the
Law XXXVI of 2012, the obligation to submit a
wealth declaration extends to close family
members (spouse, domestic partner, and children).
Pursuant to Section 90(3) of the Law XXXVI of
2012, members of the Monetary Council who fail
to submit a wealth declaration will not be allowed
to exercise their functions and will receive no
remuneration until compliance with the obligation.
This provision allows for the temporary removal
from office of inter alia the Governor which seems
to automatically fall into place once the failure to
submit a wealth declaration as required by the
above provisions is established by the Parliament.
Such an automatism may lead to situations where
the removal from office would result from an
unintentional action that could not be qualified as a
serious misconduct under Article 14.2 of the
Statute of the ESCB. In order to preserve fully the
principle of central bank independence, this
incompatibility should be removed by an
amendment of Section 157 of the MNB Act which
would provide for an exception for such kind of
unintentional omission.
5.1.3. Prohibition of monetary financing and
privileged access
clearly specified that the loan is granted against
adequate collateral to ensure that the MNB would
not suffer any loss in case of debtor's default.
Pursuant to Section 37, as amended (
34
), the MNB
may grant loans to the National Deposit Insurance
Fund and Investor Protection Fund in emergency
cases, subject to prohibition of monetary financing
under Section 146 of the Act. Though the Act
adequately reflects conditions for central bank
financing provided to a deposit guarantee scheme a
specific requirement should be included to ensure
that the loans granted to the National Deposit
Insurance Fund are provided against adequate
collateral (e.g. a claim on future cash
contributions, government securities, etc.) to
secure the repayment of the loan. Therefore,
Section 37 is incompatible with the prohibition on
monetary financing as laid down in Article 123 of
the TFEU.
Article 177(6) of the MNB Act provides for state
compensation to the MNB of all expenses resulting
from obligations which exceed the assets the MNB
has taken over from the HFSA. The law does not
contain any provisions on the procedure and
deadlines on how the state shall reimburse the
MNB of the expenses. Therefore, the
reimbursement under Article 177(6) of the MNB
Act is not accompanied by measures that would
fully insulate the bank from all financial
obligations resulting from any activities and
contractual relationships of the HFSA originating
from prior to the transfer of tasks. In case of a
substantial time gap between the costs arising to
the MNB and the reimbursement by the state
pursuant to Article 177(6) of the MNB Act, the
reimbursement would result in an ex-post
financing scheme. Should the expenses incurred at
the MNB exceed the value of assets taken over
from the HFSA, such a scenario would constitute a
breach of the prohibition of monetary financing
laid down in Article 123 of the TFEU. In order to
comply with the prohibition of monetary
financing, Sections 176 and 183 of the MNB Act
should be amended in order to insulate the MNB
by appropriated means from all financial
obligations resulting from the HFSA's prior
activities or legal relationships and obligations
including those deriving from the automatic further
employment of HFSA staff by the MNB.
Pursuant to Section 36 of the MNB Act and
subject to the prohibition of monetary financing set
out under Section 146 of the MNB Act, the MNB
can provide an emergency loan to credit
institutions in the event of any circumstance
arising in which the operation of a credit institution
jeopardizes the stability of the financial system. In
order to comply with the prohibition on monetary
financing of Article 123 of the TFEU, it should be
(
34
) Article 37 was amended, as from July 2015, by Act
LXXXV on Amendments of Acts to promote the
Development of the Financial Intermediary System.
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On 26 April 2016 the Hungarian legislator adopted
an amendment to Section 162 of the MNB Act
which remedied a law which was previously found
unconstitutional by the Hungarian Constitutional
Court (
35
). The new amendment to the MNB Act
introduces provisions on the conditions of
disclosure of data by a company related to the
MNB (
36
). Furthermore, the amendment provides
for supervision of the State Audit Office of the
operations of foundations established by the
MNB (
37
).
Notwithstanding the limitations regarding access
to data of MNB companies, it is noted that
pursuant to the principle of sincere cooperation
(Article 4 TEU) a Member State is required, in full
mutual respect, to assist the Commission and the
European Central Bank in carrying out tasks which
flow from the Treaties, such as providing the
information necessary for monitoring the
application of EU law.
5.1.4. Integration in the ESCB
Objectives
secondary objective of the ESCB enshrined in
Article 127 (1) of the TFEU and Article 2 the
Statute of the ESCB in order to embrace the
support of the general economic policies in the
entire EU rather than in Hungary only.
Tasks
The MNB Act contains a series of
incompatibilities with regard to the following
ESCB/ECB tasks:
• definition of monetary policy and the monetary
functions, operations and instruments of the ESCB
(Sections 1 (2) and (3), 4, 16 – 21, 159 and 171 of
the MNB Act);
• conduct of foreign exchange operations (Sections
1(2), 4(3), (4) and (12), 9 and 159(2) of the MNB
Act) and the definition of foreign exchange policy
(Sections 1(2), 4(4) and (12), 22 and 147 of the
MNB Act);
• competences of the ECB and of the Council for
banknotes and coins (Article K of the Fundamental
Law and Sections 1(2), 4(2) and (12), 9, 23, 26 and
171(1) of the MNB Act);
There are also some imperfections in the MNB Act
regarding the:
• non-accurate reflection of the principle of central
bank independence in the MNB Act (section 1 (2)
and (3) of the MNB Act)
• non-recognition of the role of the ECB in the
functioning of the payment systems (Sections 1(2),
4(5) and (12), 9, 27-28, and 159(2), 171 (2) and (3)
of the MNB Act);
• non-recognition of the role of the ECB and of the
EU in the collection of statistics (Section 1(2),
30(1) and 171(1) of the MNB Act);
• non-recognition of the role of the ECB in the
field of international cooperation (Section 135 (5)
of the MNB Act));
• absence of an obligation to comply with the
Eurosystem's regime for the financial reporting of
NCB operations (Section 12(4)(b) and Law C of
2000/95 (IX.21.) in conjunction with Government
Decree 221/2000 (XII.19.));
Article 3(2) of the MNB Act determines that,
without prejudice to the primary objective of price
stability, the MNB shall uphold to maintain the
stability of the financial intermediary system, to
increase its resilience, to ensure its sustainable
contribution to economic growth and support the
economic policy of the government. The objective
laid down in Article 3(2) of the MNB Act is
reduced to supporting the economic policy in
Hungary. The Article has to be aligned to the
(
35
) Decision Hungarian Constitutional Court – No 8/2016 of
31 March 2016.
(
36
) Data relating to any task of the MNB and processed by
company mostly or entirely owned by the MNB shall not
be public until published by the company, but at most ten
years from the time it was generated, if such disclosure
would compromise the central economic or monetary
policy. Furthermore, data relating to business activities and
processed by companies mostly or entirely owned by the
MNB or a company directly or indirectly managed by such
a company shall not be disclosed if it would cause
disproportionate harm to the company's business activity.
Disproportionate harm is defined as providing an undue
advantage to any competitor of such MNB company.
(
37
) The original amendment to the MNB Act which was found
unconstitutional
inter alia
provided that regarding
foundations established by the MNB only data relating to
the founder including the charter as well as information
regarding the financial contribution required for the
foundation’s purpose as set out in the charter, should be
public; any other data managed by the foundation should
be accessible exclusively in accordance with the law on
civil associations instead of laws on access to information
of public interest. This provision was repealed.
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• non-recognition of the role of the ECB and the
Council in the appointment of external auditors
(Sections 6 (1) (b), 15 and 144 of the MNB Act).
5.1.5. Assessment of compatibility
As regards central bank independence of the MNB,
the prohibition on monetary financing and the
integration of the MNB into the ESCB at the time
of euro adoption, existing Hungarian legislation is
not fully compatible with the Treaties and the
Statute of the ESCB and the ECB pursuant to
Article 131 of the TFEU.
5.2.
PRICE STABILITY
5.2.1. Respect of the reference value
several months, but there was no real threat of
deflation, as core inflation remained around 1-2%.
Headline inflation hovered around zero in 2014,
amid deep price decreases of unprocessed food and
energy. Although GDP growth was high, domestic
demand generated no inflationary pressure yet, in
the context of historically low inflation
expectations. By January 2015, the decline in
market energy and food prices pushed headline
inflation to -1.4%. The oil price decrease
continued in 2015, and although the forint
depreciated and the output gap closed according to
the Commission services' methodology, the pass-
through to consumer prices was slow and limited.
Nevertheless, HICP inflation rose to 1% by end-
2015, partly due to unprocessed food prices. In
early 2016 inflation fell again, mainly due to a
VAT cut on some meat products and a further drop
in the oil price.
Graph 5.2:
Hungary - HICP inflation
(y-o-y percentage change)
8
The 12-month average inflation rate, which is used
for the convergence assessment, was below the
reference value at the time of the last convergence
assessment of Hungary in 2014. Average annual
inflation fell to -0.3% by March 2015, before
starting to gradually rise again. In April 2016, the
reference value was 0.7%, calculated as the
average of the 12-month average inflation rates in
Bulgaria, Slovenia and Spain plus 1.5 percentage
points. The average inflation rate in Hungary
during the 12 months to April 2016 was 0.4%, i.e.
0.3 percentage points below the reference value.
The 12-month average inflation rate is projected to
remain below the reference value in the months
ahead.
Graph 5.1:
Hungary - Inflation criterion since 2010
(percent, 12-month moving average)
6
6
4
2
0
-2
2010
2011
2012
Hungary
2013
2014
2015
Euro area
Source: Eurostat.
5
4
3
2
1
0
-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Hungary
Reference value
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
5.2.2. Recent inflation developments
Annual HICP inflation in Hungary over the last
two years reflected mainly global trends and was
mostly driven by the fall in oil prices. The annual
changes of consumer prices were negative in
Core inflation (measured as HICP inflation
excluding energy and unprocessed food) was less
volatile than HICP inflation over the past two
years. Core inflation declined from around 2% in
mid-2014 to 0.8% by end-2014. It increased in
early 2015 and remained around 1.5% from April
2015. Processed food inflation fell from above 3%
in mid-2014 to zero by early 2015, supported by
lower unprocessed food prices. It then gradually
increased to around 1% by end-2015, before
decreasing again in early 2016. Prices of non-
energy industrial goods started rising in 2015, after
having remained at an unchanged level in 2014,
reflecting the impact of the weakening exchange
rate and strengthening domestic demand. Services
inflation was rather stable at around 2% over the
past two years, with no significant wage pressure
appearing, despite the tightening labour market.
Industrial producer price inflation turned negative
in early 2014 and was still negative in early 2016,
56
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Table 5.1:
Hungary - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
4.7
1.9
11.8
5.9
4.0
3.9
3.3
2.5
6.7
2011
3.9
1.3
9.3
2.8
6.1
2.1
3.0
3.7
4.8
2012
5.7
2.6
8.6
6.2
9.0
4.1
5.0
3.5
5.1
2013
1.7
0.3
-6.1
6.9
4.8
3.6
3.0
1.2
-4.8
2014
0.0
0.0
-6.6
-1.9
2.4
2.3
1.6
0.0
-6.1
(percentage change)
1)
2015
0.1
0.8
-7.4
3.6
0.5
2.2
1.3
0.0
-0.7
Apr-16
0.4
1.1
-6.2
4.3
0.7
2.1
1.4
0.4
0.1
weights
in total
2016
1000
217
154
80
217
332
766
1000
151
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
suggesting that pipeline price pressures remain
contained.
5.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
After reaching the rate of 3.7% in 2014, real GDP
growth in Hungary declined to 2.9% in 2015.
Private consumption and the external sector both
picked up and contributed to growth. The former
grew by 3% in 2015, supported by household real
disposable income, which was also growing
strongly thanks to low inflation and high nominal
wage growth. Households have also benefited
from one-off measures including a reimbursement
from banks for so-called illegitimate interest and
exchange rate changes. The 1 pp. cut in the flat
personal income tax rate introduced in January
2016 had a similar effect. The good performance
of the labour market also supported consumption.
Based on the Commission services' Spring 2016
Forecast, real GDP growth is expected to reach
2.5% in 2016 and 2.8% in 2017. The output gap is
estimated to have closed in 2015.
The fiscal policy stance, as measured by the
change in the structural balance, was significantly
loosened in 2014 (by some 0.7 pp. of GDP) mostly
on account of dynamic growth of cyclically-
adjusted government expenditure in the election
year. There was some tightening in 2015, but the
Commission services' Spring 2016 Forecast
projects a renewed loosening in 2016, followed by
a partial reversal of this effect in 2017.
Monetary policy, conducted within an inflation
targeting framework (
38
), has been further loosened
since 2014, in view of below-target inflation.
Starting from 7% in August 2012, the base rate
was gradually reduced to 2.1% by July 2014. In
March 2015, the MNB restarted the rate-cutting
cycle, lowering the policy rate in five equal steps
to 1.35% by July 2015. The MNB resumed policy
rate reduction in March 2016 (by 15 basis points
steps), with the policy rate reaching 1.05% by end-
April. In addition to policy rate cuts, the MNB also
loosened its policy via unconventional measures,
in particular through the Funding for Growth
Scheme (FGS) and from 2016 the Growth
Supporting Programme (GFP) which aim to foster
lending to SMEs. General credit conditions
remained tight in the last two years, despite some
gradual easing. Net lending to corporates turned
positive in 2014 thanks to the FGS, but it was
negative again in 2015, partly due to one-off
factors.
Wages and labour costs
The improvement of the labour market continued
in 2014-2015. Employment grew by around 5% in
2014 and 3% in 2015, not only due to the
government’s public works scheme, but also
because of job creation in the private sector. The
unemployment rate reached an all-time low, falling
below 7% in 2015. Accordingly, nominal wage
growth was around 4% in 2015, with no sign of
moderation, despite the low-inflation environment.
(
38
) Since August 2005, the MNB pursues a continuous
medium-term inflation target of 3% with a permissible
fluctuation band of +/- 1 percentage point (which was
changed from 'ex post' to 'ex ante' in March 2015).
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Table 5.2:
Hungary - Other inflation and cost indicators
2010
HICP inflation
Hungary
Euro area
Private consumption deflator
Hungary
Euro area
Hungary
Euro area
Labour productivity
Hungary
Euro area
Nominal unit labour costs
Hungary
Euro area
Imports of goods deflator
Hungary
Euro area
1.7
6.0
5.0
7.0
4.3
2.6
-0.6
-2.0
0.1
-2.6
-1.3
-0.6
1.4
0.6
4.0
1.9
0.9
1.1
2.0
1.0
1.0
2.8
1.7
1.5
-1.8
-0.1
0.9
0.6
-1.1
0.3
3.7
1.6
-0.3
2.2
3.7
2.3
3.1
2.2
6.3
1.9
2.1
1.8
2.1
1.1
1.8
1.7
1.0
0.5
0.9
1.3
4.7
1.6
3.9
2.7
5.7
2.5
1.7
1.3
0.0
0.4
2011
2012
2013
2014
(annual percentage change)
2015
0.1
0.0
0.1
0.2
3.3
1.2
0.1
0.6
3.2
0.7
-1.1
-3.6
2016
1)
0.4
0.2
0.8
0.4
4.6
1.5
1.6
0.5
2.9
0.9
-0.5
-2.7
2017
1)
2.3
1.4
2.3
1.3
4.3
1.9
2.7
0.8
1.5
1.1
0.3
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
Graph 5.3:
Hungary - Inflation, productivity and wage trends
8
(y-o-y % change)
4
0
inflation is accentuated by their relatively high
weight in the HICP basket. Growth of import
prices (measured by the imports of goods deflator),
had almost no inflationary effect in 2014, while the
disinflationary impact started to dominate in 2015
(the deflator turned negative again) and this is
expected to fade over the forecast horizon.
2017
-4
2010
2011
2012
2013
2014
2015
2016
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
Source: Eurostat, Commission services' Spring 2016 Forecast.
Labour productivity growth was negative in 2014
and zero in 2015, but it is expected to gradually
increase over the forecast horizon. Compensation
per employee growth was also below 1% in 2014,
but its pick-up in 2015 contributed to an increase
in unit labour costs by around 2%. The ULC
growth is to remain broadly stable in 2016 and it is
projected to decrease in 2017 with the increase in
labour productivity growth.
External factors
Import price dynamics have been significantly
influenced by exchange rate fluctuations. The
forint's nominal effective exchange rate (measured
against a group of 36 trading partners) weakened
on average by 3.2% in 2014 and by further 2.1% in
2015. The change of the nominal effective
exchange rate would suggest inflationary pressure,
but the pass-through of the exchange rate
depreciation to consumer prices appears much
smaller than in the past. Looking ahead, the change
of import prices is expected to remain supportive
of a low-inflation environment in 2016, pending
only moderate weakening of the exchange rate.
Administered prices and taxes
The share of administered prices (
39
) in the HICP
basket is relatively high in Hungary at around
(
39
) According to the Eurostat definition, administered prices in
Hungary include inter alia water supply, refuse and
sewerage collection, electricity, gas, heat energy,
pharmaceutical products, certain categories of passenger
transport and postal services. For details, see
http://ec.europa.eu/eurostat/documents/272892/272989/HI
Given the
Hungarian
prices play
formation.
agricultural
high degree of openness of the
economy, developments in import
an important role in domestic price
The impact of lower energy and
commodity prices on headline
58
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16%, compared to the euro area average (13%).
Administered prices declined by 4.8% in 2013,
chiefly on account of three waves of cuts in
regulated energy and other utility prices introduced
as of January, July and November. These measures
had an overall effect on the inflation rate of over -1
pp. for 2013 and entail − as a full-year effect − an
additional reduction in the inflation rate of around
1 pp. for 2014. A further round of utility price cuts
happened in April, September and October 2014
(with smaller items like the price of chimney
sweeping and school textbooks), which decreased
annual HICP by an additional 0.2 pp. in 2014 and
2015. Overall, administered prices lowered
headline inflation by about 1.2 pp. in 2014 and 0.1
pp. in 2015
Changes in taxation had a very limited effect on
inflation in 2014-2015. There were no major
indirect tax changes in these two years, only some
excise duty increases on alcoholic beverages and
tobacco. The harmonised index of consumer prices
at constant tax rates reflects the lack of significant
changes in the tax system in 2014 and 2015.
Starting from 2016, the VAT on some meat
products was reduced to 5 percent, which would
have a downward effect on headline inflation of
about 0.2 pp., assuming full pass through.
Medium-term prospects
The level of consumer prices in Hungary stood at
about 57% of the euro area average in 2014, with
the relative price gap larger for services than for
goods. This suggests that there is scope for further
price level convergence in the long term, as
income levels (around 64% of the euro area
average in PPS in 2014) rise towards the euro area
average.
Medium-term inflation prospects will depend
strongly on wage and productivity developments,
notably on efforts to avoid excessive wage
increases in the non-tradable sector and on the
success with anchoring inflation expectations at
the central bank's 3% target.
5.3.
PUBLIC FINANCES
5.3.1. Recent fiscal developments
The historically low inflation figures over the past
years have been driven to a large extent by the fall
in oil prices. Core inflation stood at a moderate
level, close to 1% in early 2016, although the
output gap closed. Therefore once the effects of
low oil prices fade, domestic demand is expected
to push inflation to converge towards the central
bank's 3% target. Accordingly, the Commission
services' Spring 2016 Forecast projects HICP
inflation to average 0.4% in 2016 and 2.3% in
2017.
Risks to the inflation outlook appear to be broadly
balanced. Upside risks to the projection relate
mainly to a stronger-than-expected recovery and a
possible weakening of the exchange rate. At the
same time, if the global inflation environment
weakens further, this could translate into
continuing low inflation.
On 21 June 2013, the Council decided to abrogate
the decision on the existence of an excessive
deficit according to Article 126 (12) TFEU,
thereby closing the excessive deficit procedure for
Hungary (
40
). Since then, the general government
deficit has been kept firmly below 3% of GDP.
The deficit decreased to 2.3% of GDP in 2014
from 2.6% in the previous year, and then declined
further reaching 2.0% GDP in 2015. Both
government revenues and expenditure increased
during this period relative to GDP, but the latter to
a smaller extent, resulting in an improved fiscal
balance. The revenue-to-GDP ratio went up from
47% in 2013 to 47.5% in 2014, and then further to
48.9% in 2015. This development reflected an
elevated level of EU funds absorption by the
general government and an upward trend in the tax
burden, primarily due to improvements in tax
administration and a tax-rich nature of the
economic recovery. At the same time, the
expenditure ratio went up by more than 1 pp. over
the two years surpassing 50% of GDP.
The 2015 budgetary outturn overachieved the
deficit target set in the 2015 Convergence
Programme by 0.4 pp. of GDP. Tax and social
security receipts significantly exceeded the
budgeted numbers, while interest expenditure
turned out to be lower. The resulting deficit-
improving impact was partially absorbed by extra
expenditure, most notably the higher-than-
(
40
) An overview of all excessive deficit procedures can be
found at: http://ec.europa.eu/economy_finance/economic_
governance/sgp/deficit/index_en.htm
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
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Table 5.3:
Hungary - Budgetary developments and projections
Outturn and forecast
General government balance
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
3) 4)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Excluding Eximbank.
3) Cyclically-adjusted balance excluding one-off and other temporary measures.
3)
1) 2)
(as % of GDP unless indicated otherwise)
2013
-2.6
47.0
49.6
4.5
38.2
1.9
-1.4
0.1
-1.5
76.8
1.9
-2.4
2014
-2.3
47.5
49.8
4.0
38.6
1.7
-1.9
0.3
-2.2
76.2
3.7
-0.7
2015
-2.0
48.7
50.7
3.6
39.2
1.6
-2.1
0.0
-2.0
75.3
2.9
0.1
2016
-2.0
46.4
48.4
3.1
38.7
1.1
-2.2
0.7
-2.9
74.3
2.5
0.5
2016
-1.9
-2.6
74.5
2.5
2017
-2.0
46.1
48.1
3.0
38.3
1.0
-2.5
0.0
-2.5
73.0
2.8
1.0
2017
-2.4
-2.5
73.6
3.1
2018
-1.8
-2.1
72.4
3.4
2019
-1.5
-2.0
68.4
3.1
2010
-4.5
45.0
49.6
4.1
37.5
-0.4
-2.9
0.7
-3.6
80.6
0.7
-3.3
2011
-5.5
44.3
49.7
4.2
36.9
-1.3
-4.7
-0.2
-4.5
80.8
1.8
-1.5
2012
-2.3
46.3
48.6
4.6
38.6
2.3
-0.7
0.7
-1.4
78.3
-1.7
-3.3
4) Commission services’ calculations on the basis of the information in the programme. One-off and other temporary measures
taken from the programme (0.7 % of GDP in 2016, deficit-reducing; zero afterwards).
Sources: Commission services, the 2016 Convergence Programme of Hungary.
expected spending from the domestic sources on
EU co-financed projects. The cyclical upturn seen
since 2013 has facilitated the containment of the
general government deficit with strong revenue
dynamics and a favourable denominator effect on
the expenditure-to-GDP ratio. However, the
structural balance deteriorated considerably,
decreasing by 0.7 pp. to below -2% of GDP in
2014 and improving only slightly to -2% in 2015
despite the better-than-expected headline deficit.
Following the selling of the previously acquired
second-pillar pension fund assets, the government
debt-to-GDP ratio remained on a declining path,
but the pace of debt-reduction slowed down
somewhat. It decreased by around 1�½ pp. over two
years to close to 75% by the end of 2015, helped
by a relatively low budget deficit and high nominal
GDP growth (
41
). The reduction of the public debt
was hampered by adverse stock-flow adjustment
developments including the financial costs of state
acquisitions of corporate assets, the revaluation
effect of foreign-exchange-denominated debt, as
well as delays in the reimbursement of EU funds.
5.3.2. Medium-term prospects
(
41
) Eurostat has expressed a reservation on the quality of
government finance data reported by Hungary in the April
2016 notification. This relates to the sector classification of
Eximbank and would result in an increase of the
government debt level for all years.
The 2016 budget was adopted by the Hungarian
Parliament on 23 June 2015, well ahead of the
standard mid-December date. It targets a deficit of
2% of GDP, while incorporating considerable tax
cuts and some new spending commitments.
Revenue-side measures, amounting to 0.7% of
GDP, include the halving of the bank levy, a 1 pp.
decrease of the flat rate personal income tax and an
increase of the family tax allowance after two
children as well as the cutting of the VAT rate on
unprocessed pork meat. On the expenditure side,
the budget extends career path schemes to civil
servants in central government and entails extra
appropriations for the public works scheme and
capital expenditure from domestic sources. The
deficit-increasing effect of these new measures is
planned to be more than counterbalanced by
declining interest outlays, savings in spending on
social transfers and the domestic co-financing of
EU funded projects as well as by contained
expenditure on operating costs. In addition, the
budget counts on substantial one-off revenues
(around 0.4% of GDP) from agricultural land sales
60
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to cover the costs of investment projects of the so-
called Investment Fund. In late 2016, the
Parliament enacted further measures with
significant budgetary effects (estimated at some
0.3% of GDP) aimed at boosting the construction
of residential houses, introducing a new generous
housing grant scheme for families with children
and cutting the VAT rate on newly built flats.
The Commission services' Spring 2016 Forecast
projects the current year's deficit at 2% of GDP,
i.e. identical with the official target. The forecast
counts on a considerably increased budgetary
breathing space even compared to the initial
budgeted numbers. This is the result of favourable
base effects, lower-than-expected interest outlays,
higher-than-planned receipts from agricultural land
sales and a sizeable windfall in corporate income
tax expected to be paid under a corporate income
tax credit arrangement in 2016 and 2017. Based on
updated government plans, however, these deficit-
improving effects are estimated to be absorbed by
expenditure increasing measures. Based on a no-
policy-change assumption, the deficit is projected
to remain at 2% of GDP in 2017 (
42
). While the
headline deficit is forecast to remain stable, the
structural budget balance is expected to deteriorate
sharply to around -3% of GDP in 2016 and then to
reverse to around -2.5% in 2017. This reflects the
cyclical upturn of the economy and a one-off effect
in 2016. At the same time, the debt ratio is
expected to decline further to 73% by the end of
2017, even though delays in the receipt of EU
funds are assumed to have a debt-increasing effect
throughout the forecast horizon.
The 2016 Convergence Programme, covering the
period of 2016-2020, was submitted by the
Hungarian authorities on 30 April 2016. It plans
the headline deficit to increase to 2.4% of GDP by
2017 and then to decrease gradually to 1.2% of
GDP by 2020. The government plans a gradual
improvement of the structural balance in order to
reach its medium-term objective, a deficit of 1.5%
of GDP in structural terms as of 2017. However,
using the commonly agreed methodology, the
recalculated structural deficit would remain higher
than the MTO throughout the programme period.
Based on its assessment of the convergence
programme and taking into account the
Commission services' Spring 2016 Forecast, the
(
42
) Following the cut-off date of the Spring Forecast, the
government released the new 2017 draft budget increasing
the deficit target to 2.4% of GDP. The new measures
include VAT cuts for specific goods, which could not be
incorporated yet in the Commission forecast.
Commission is of the opinion that there is a high
risk that Hungary will not comply with the
provisions of the Stability and Growth Pact, as it is
expected to significantly deviate from the
preventive arm requirements. Further details can
be found in the Assessment of the 2016
Convergence Programme for Hungary (
43
).
As far as the fiscal framework is concerned –
which refers to numerical fiscal rules, medium-
term budgetary frameworks, independent fiscal
institutions, and budgetary procedures – the
process of re-regulation started with the adoption
of the new Fundamental Law in 2011 has led to
mixed results. The ongoing revamp has weakened
some aspects of the efficiency of its operation
(most notably by replacing the forward-looking
real debt rule with a pro-cyclical debt ceiling),
while strengthening others (inter alia, providing a
constitutional basis for the new set-up). The
progressively introduced set of national numerical
rules has been all complied with over the last
couple of years. Despite the recent gradual
reinforcements, the Fiscal Council is not yet a
body with a strong analytical basis, in contrast
with its veto power over the annual budget bill.
The medium-term budgetary framework was
revamped in late 2013, but its implementation was
repeatedly delayed and its effectiveness in
genuinely lengthening the planning horizon is yet
to be established.
5.4.
EXCHANGE RATE STABILITY
The Hungarian forint does not participate in ERM
II. Between mid-2001 and early 2008, the MNB
operated a mixed framework that combined an
inflation target with a unilateral peg of the forint to
the euro, with a fluctuation band of +/-15%. On 26
February 2008, the exchange rate band was
abolished and a free-floating exchange rate regime
was adopted that however allows for foreign
exchange interventions by MNB. In March 2015, a
+/-1 percentage point ex ante tolerance band was
designated around the continuous medium-term
inflation target of 3 percent (that is in place since
2005), representing that inflation may fluctuate
around the point target as an effect of shocks.
In the context of improving imbalances in Hungary
being more than counterweighted by relatively
(
43
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
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looser monetary policy and rising geopolitical risks
(mainly related to the conflict in Ukraine), the
forint depreciated against the euro by about 4%
between May 2012 and May 2014. The forint fell
further in summer 2014, but regained those losses
in the autumn, as the rate-cutting cycle ended in
Hungary and the MNB provided FX liquidity for
housing
mortgage
loan-related
currency
conversions to the banking sector. The forint was
again weaker in January 2015 (HUF/EUR 316.5),
following the SNB's decision to let the CHF
appreciate, but then strenghtened in the wake of
further monetary easing in the euro area. Since
June 2015, the forint has been broadly stable
against the euro, trading mostly between 310 and
315. Overall, during the two years before this
assessment, the forint depreciated against the euro
by about 1%. Inter-day exchange rate volatility
during this period was highest in March 2015 and
declined since then.
Graph 5.4:
Hungary - HUF/EUR exchange rate
(monthly averages)
340
320
300
280
around 200 basis points thereafter till March 2015.
The MNB then restarted the rate-cutting cycle
lowering the policy rate over five month by overall
75 basis points to 1.35%, which also mostly
showed up in a narrowing interest rate differential.
From September 2015, the MNB changed its key
policy instrument from the two-week deposit to a
three-month deposit instrument. However, short-
term interest rate differentials widened again from
late 2015, due to the impact of the ECB's asset
purchase programmes on euro-area money market
interest rates. The MNB resumed policy rate
reduction in March 2016, cutting by 15 basis
points in both March and April. At the cut-off date
of this report, the 3-month spread vis-à-vis the
euro area reached around 140 basis points.
Graph 5.5:
Hungary - 3-M Bubor spread to 3-M Euribor
(basis points, monthly values)
800
600
400
200
0
2010
2011
2012
2013
2014
2015
2016
260
240
Source: National Bank of Hungary.
220
2010
2011
2012
2013
2014
2015
2016
Source: ECB.
5.5.
LONG-TERM INTEREST RATES
International reserves hovered generally around
EUR 35bn between early 2012 and mid-2015, at a
level two times higher than that of the 2006-2008
pre-crisis period. The level of international
reserves was mainly influenced by sovereign debt
management decisions (e.g. no international bond
issuance in 2015), MNB measures (e.g. the Self-
Financing Programme and its FX swaps with the
banking sector for the conversion of household
foreign exchange loans) and the uneven payment
of EU funds. Accordingly, international reserves
fell to around EUR 30bn by end-2015, which
corresponded to about 28% of GDP. Hungary
repaid the last tranches of its 2008 EU-IMF
financial assistance in November 2014 (EUR 2bn)
and April 2016 (EUR 1.5bn) to the EU.
Short-term interest rate differentials vis-à-vis the
euro area decreased till August 2014 in parallel
with the MNB's policy rate reductions and stayed
For Hungary, the development of long-term
interest rates is assessed on the basis of secondary
market yields on a single benchmark bond with a
residual maturity of around 9 years.
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Graph 5.6:
Hungary - Long-term interest rate criterion
(percent, 12-month moving average)
12
10
8
6
Graph 5.7:
Hungary - Long-term interest rates
(percent, monthly values)
10
8
6
4
4
2
2
0
Jan-10
0
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
2010
2011
2012
Hungary
2013
2014
Germany
2015
2016
Hungary
Reference value
Source: Commission services.
Source: Eurostat.
The Hungarian 12-month moving average long-
term interest rate relevant for the assessment of the
Treaty criterion was below the reference value at
the time of the 2014 convergence assessment of
Hungary. It then fell from 5.8% to 3.4% by late
2015 and has remained broadly stable since then.
In April 2016, the latest month for which data are
available, the reference value, given by the average
of long-term interest rates in Bulgaria, Slovenia
and Spain plus 2 percentage points, stood at 4.0%.
In that month, the 12-month moving average of the
yield on the Hungarian benchmark bond stood at
3.4%, i.e. 0.6 percentage points below the
reference value.
The long-term interest rate of Hungary decreased
between early 2012 and early 2015 by about 650
basis points, approaching 3%. This reflected
improving financial market confidence and falling
domestic inflation, against the background of a
global search for yields. Long-term interest rates
increased with rising US and euro-area yields
between February and June 2015. Afterwards,
Hungarian long-term yields fell somewhat further
in 2015, facilitated by low inflation until the Fed's
rate hike and stayed broadly around 3.3% since
then. Long-term spreads vis-à-vis the German
benchmark bond stood at some 290 basis points in
April 2016.
5.6.
ADDITIONAL FACTORS
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product, labour and financial
market integration – gives an important indication
of a Member State's ability to integrate into the
euro area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
44
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Hungary exceeded the
indicative threshold in three out of fourteen
indicators, two in the area of external imbalances
(i.e. the net international investment position and
export market share) and one in the area of internal
imbalances (i.e. general government gross debt). In
line with the conclusion of the AMR 2016 (i.e. that
imbalances had been identified for Hungary in the
previous MIP round), Hungary was subject to an
in-depth review which found that Hungary is not
experiencing macroeconomic imbalances.
5.6.1. Developments
payments
of
the
balance
of
The external balance of Hungary (i.e. the
combined current and capital account) gradually
increased to 7.6% of GDP by 2013. The external
surplus reached around 6% of GDP in 2014 and
rose to nearly 9% of GDP in 2015. The
improvement reflected higher surpluses in both the
(
44
)
http://ec.europa.eu/europe2020/pdf/2016/ags2016_al
ert_mechanism_report.pdf
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Table 5.4:
Hungary - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
0.8
2.9
3.3
-4.8
-0.6
2.3
3.1
0.7
-1.4
-6.3
4.5
-2.0
3.9
-3.2
-2.5
20.5
21.3
161.5
-106.4
2012
1.8
2.9
3.8
-4.2
-0.8
2.6
4.3
4.7
-2.2
-1.5
11.8
-3.9
-3.3
8.1
0.4
19.5
21.1
158.3
-94.2
2013
3.9
3.4
3.9
-2.8
-0.5
3.6
7.6
6.2
-0.1
-3.0
8.1
-5.0
1.1
5.1
-1.4
20.6
24.6
145.5
-83.5
2014
2.0
2.4
4.7
-4.5
-0.7
3.7
5.7
4.6
-2.8
3.0
3.6
-1.9
0.7
3.9
-1.1
22.2
24.4
145.0
-75.5
2015
4.2
3.9
4.7
-3.7
-0.7
4.5
8.7
7.5
-1.0
5.2
7.8
0.0
-4.5
12.0
-1.2
22.0
26.9
133.7
-69.9
0.3
2.7
2.7
-4.7
-0.4
1.8
2.1
1.1
-2.9
0.3
0.7
0.0
3.1
-2.0
-1.0
20.7
21.0
160.5
-108.9
of which: Direct investment
Portfolio investment
Other investment
3)
Of which International financial assistance
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, Magyar Nemzeti Bank.
current and capital accounts. The current account
surplus increased from 2% of GDP in 2014 to
around 4% of GDP in 2015, mainly due to an
increase in the trade in goods balance. The primary
income balance also improved from 2014 to 2015.
The growing capital account surplus reflected
higher absorption of EU funds.
Graph 5.8:
Hungary - Saving and investment
(in percent of GDP at market prices)
corresponding indicator doubled (from 1.6% in
2014 to 3.4% in 2015). Overall investment as a
share of GDP has increased between 2013 and
2015, reflecting positive real growth in gross fixed
capital formation. However, it remained at
relatively low levels compared to the pre-crisis
years, despite the record high inflow of EU funds.
Graph 5.9:
Hungary - Effective exchange rates
120
30
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
20
110
10
100
0
2010
2011
2012
2013
2014
2015
90
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
80
2010
NEER
2011
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Hungary's savings-investment surplus decreased in
2014 and increased in 2015. Accordingly, the high
savings rate in the economy declined slightly from
2013 to 2014 but increased further by 2.5 pp. in
2015. The savings rate of the household sector
increased further, the enterprise sector's savings
rate decreased while the government sector's
Source: Commission services.
Despite some minor volatility, price and cost
competitiveness indicators of Hungary have
generally improved over the last two years. The
weakening of the nominal effective exchange rate
of the forint in 2014 and 2015 was reflected in the
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Convergence Report 2016 - Technical annex
Chapter 5 - Hungary
Table 5.5:
Hungary - Market integration
2010
Trade openness
1)
2011
90.9
49.2
0.4
51
48
1.4
93.1
2.2
2012
92.5
50.7
-3.1
54
60
0.5
84.4
2.0
2013
92.0
51.0
4.9
54
63
0.6
80.5
1.4
2014
93.3
53.4
3.8
40
60
0.6
83.0
1.6
2015
94.9
54.7
4.2
42
63
0.8
92.7
n.a.
(%)
4)
84.1
45.5
0.3
46
52
1.4
100.0
3.1
6)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
real-effective exchange rate deflated by HICP,
while the ULC-based measure remained broadly
stable. Hungary's export performance improved
markedly both in 2014 and 2015.
Mirroring a continuous external surplus, the
financial account has also been positive according
to the new methodology. Direct investment
registered a net inflow of 2.8% of GDP in 2014
and 1% of GDP in 2015. Portfolio investment net
outflows reached 3.0% of GDP in 2014 and rose to
5.2% in 2015, partly reflecting the withdrawal of
foreign investors from forint-denominated
government securities. Other investment continued
to register large outflows in 2014-15, while
international reserves fell in 2015. The decrease of
external debt, which is ongoing since 2011,
proceeded slowly in 2014, but accelerated in 2015.
The net international investment position improved
from around -109% of GDP in 2010 to
around -70% of GDP by end-2015.
The EU-IMF international financial assistance
granted to Hungary in autumn 2008 expired in late
2010. The remaining programme-related IMF debt
was repaid early in summer 2013. Of the EUR
5.5bn disbursed by the EU, EUR 2bn was repaid in
November 2014 and EUR 1.5bn in April 2016.
The EU's post-programme surveillance was
discontinued in January 2015.
According to the Commission services' Spring
2016 Forecast, the external surplus is expected to
remain at around 8% of GDP in both 2016 and
2017.
5.6.2. Market integration
The Hungarian economy is highly integrated with
the euro area through trade and investment
linkages. Trade openness increased from 84% in
2010 to 95% in 2015, reflecting the deeper
integration of the Hungarian economy into
continental and global supply chains. Flows with
the euro area dominate trade, accounting for
around 55% of the total trade in goods and
services. Outside the euro area, the main goods
trading partners in 2015 were Poland, the Czech
Republic and Romania.
The stock of FDI in Hungary amounted to some
80% of GDP in 2014 (excluding SPEs), with FDI
mainly originating from Germany, the Netherlands
Luxembourg and Austria. The main recipient
sectors of FDI were services (mostly 'professional,
scientific and technical activities', financial
intermediation and trade) and manufacturing (25%
of the total), suggesting that FDI plays an
important role in enhancing Hungary’s export
capacity and contributes significantly to economic
integration with the euro area.
Concerning the business environment, Hungary
performs in general worse than most euro area
Member States in international rankings.
According to the May 2015 Internal Market
Scoreboard, Hungary's transposition deficit of EU
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Convergence Report 2016 - Technical annex
Chapter 5 - Hungary
Directives was at 0.8% which is above the target
(0.5%) proposed by the European Commission in
the Single Market Act (2011).
The Hungarian labour market can be considered as
rather flexible in terms of employment protection
(as measured by the 2013 OECD employment
protection indicator for permanent workers).
Policies on social transfers, early retirement and
increasing statutory retirement age strengthened
labour supply. Both domestic and international
labour mobility is rather low in Hungary, although
the latter has increased since the financial crisis.
Graph 5.10:
Hungary - Foreign ownership and concentration
in the banking sector
60
(in percent, weighted averages)
50
40
30
20
18
16
14
12
10
8
6
4
2
0
-2
Graph 5.11:
Hungary - Selected banking sector soundness
indicators
%
HU, 2010
Return on equity
HU, Q3-15
EA, 2010
EA, Q3-15
Capital adequacy
Non performing loans
Source: ECB, EC calculations.
20
10
0
HU, 2010
HU, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
Real house prices bottomed in Hungary in 2013
following the 2008 financial crisis and the
subsequent recession. The housing market
recovery was initially slow, but it accelerated in
2015, with the real house price index reaching
93% of its 2010 level. Residential investment fell
to an almost unprecendently low level of around
1.5% of GDP in 2013-2014, while the stock of
housing loans declined in net terms.
The financial system in Hungary is smaller relative
to GDP than that of the euro area. Domestic bank
credit stood near 34% of GDP at end-2015, split
evenly between households and non-financial
corporations. Most household FX loans were
redenominated to forint loans by law effective
from early 2015. The total capitalization of the
Budapest Stock Exchange amounted to less than
15% of GDP in 2015, well below the euro-area
average of 60%. The debt securities market
remains small in comparison with the euro area
average (76% against 158% of GDP) and is mainly
used for re-financing public debt. The consolidated
stock of private sector debt at around 86% of GDP
in 2015 was significantly below the euro-area
average.
Graph 5.12:
Hungary - Recent development of the financial
system relative to the euro area
180
(in percentage of GDP)
160
140
120
100
80
60
40
20
0
HU, 2010
HU, 2015
EA, 2010
EA, 2015
Debt securities
Credit to non-financial corporations
Source: ECB, Structural financial indicators.
Hungary's financial sector remains well integrated
into the EU's financial system. This integration is
noticeable in ownership and other cross-border
linkages of the banking system. The share of bank
assets owned by foreign lenders has declined (to
39.3% in 2014 from 52.8% in 2010) as foreign
groups deleveraged and Hungarian investors,
including the Hungarian State acquired several
financial institutions in recent years. Bank
concentration, as measured by the market share of
the largest five credit institutions in total assets,
decreased to 52.5%, still above the euro-area
average of 48.4%.
The Hungarian banking system remains well-
capitalized, with a capital adequacy ratio above
17% at end-September 2015. Banks' profitability
has been suppressed by the legacy of the pre-crisis
credit boom, low economic growth and the heavy
tax burden imposed on the financial sector. In
2014, the banking sector booked a large loss due to
provisioning for the settlement of household
foreign currency denominated (mainly in Swiss
franc) mortgage loans, part of which was
unwinded in 2015. The deterioration of the loan
portfolio quality had finally ended in 2014 and the
NPL ratio reached 12.4% in September 2015.
Stock market capitalisation
Credit to households
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
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6.
6.1.
POLAND
LEGAL COMPATIBILITY
6.1.1. Introduction
The Act on the Narodowy Bank Polski (the NBP
Act) was adopted on 29 August 1997. The
consolidated version that includes all amendments
to the NBP Act was published in Dziennik Ustaw
of 2013, item 908. The NBP Act has not been
amended since the 2014 Convergence Report.
Therefore, the comments provided in the 2014
Convergence Report are largely repeated in this
year's assessment.
6.1.2. Central Bank independence
after taking an oath before the Parliament. This
oath refers to the observation of the provisions of
the Polish Constitution and other laws, the
economic development of Poland and the well-
being of its citizens. The Governor of the NBP acts
in dual capacity as a member of NBP’s decision-
making bodies and of the relevant decision-making
bodies of the ECB. Article 9(3) of the NBP Act
needs to be adapted to reflect the status and the
obligations and duties of the Governor of the NBP
as member of the relevant decision-making bodies
of the ECB. Moreover, the oath does not contain a
reference to central bank independence as
enshrined in Article 130 of the TFEU. The oath as
it stands now is an imperfection and should be
adapted to be fully in line with the TFEU and the
ESCB/ECB Statute.
The wording of the grounds for dismissal of the
NBP's Governor as enumerated in Article 9(5) of
the NBP Act could be interpreted as going slightly
beyond those of Article 14.2 of the ESCB/ECB
Statute. This imperfection should be removed to
bring Article 9(5) of the Act fully in line with
Article 130 of the TFEU.
The Law on the State Tribunal provides for
suspension of the Governor from his duties
following a procedure which is incompatible with
the principle of central bank independence and
Article 14.2 of the ESCB/ECB Statute. Pursuant to
the second sentence of Article 11(1) of the Law on
the State Tribunal read in conjunction with Article
3 and Article 1 (1)(3) of the very law, the
Governor of the NBP can be suspended as a result
of an indictment by the Parliament even before the
State Tribunal has delivered its judgment on the
removal from the office. The procedure violates
the principle of central bank independence and
Article 14.2 of the ESCB/ECB Statute given that
the latter has to be understood as allowing for
removal on grounds of serious misconduct only if
the Governor has been guilty as established by a
court decision ('guilty'). A suspension from office
on grounds of serious misconduct and further to
parliamentary indictment deprives the Governor of
the possibility to continue exercising the duties
until a court has found the Governor guilty of
serious misconduct pursuant to Article 14.2 of the
ESCB/ECB Statute. Therefore, this procedure
breaches the Statute and Article 130 of the TFEU.
The Polish Constitution and NBP Act do not
explicitly prohibit the NBP and members of its
decision-making bodies from seeking or taking
outside instructions; they also do not expressly
prohibit the Government from seeking to influence
members of NBP decision-making bodies in
situations where this may have an impact on NBP's
fulfilment of its ESCB related tasks. The absence
of such a reference to article 130 of the TFEU and
article 7 of the ESCB/ECB Statute or its content
constitutes an incompatibility. However, the Polish
Constitutional Court has recognised that the central
bank's independence is based on article 227 (1) of
the Constitution. In this respect, it is noted that at
the occasion of a future amendment to the Polish
Constitution the Polish authorities should seize the
opportunity to clarify in the Constitution that the
principle of central bank independence as
enshrined in article 130 of the TFEU and article 7
of the ESCB/ECB Statute applies. Alternatively, or
in addition the NBP Act could also be amended to
ensure full compatibility.
Article 23(1)(2) provides that the NBP's Governor
has, inter alia, to provide draft monetary policy
guidelines to the Council of Ministers and the
Minister of Finance. This procedure provides for
the opportunity for the Government to exert
influence on the monetary and financial policy of
the NBP and thus, constitutes an incompatibility in
the area of independence, with Article 130 of the
TFEU and Article 7 of the ESCB/ECB Statute.
Article 9(3) of the NBP Act foresees that the
Governor of the NBP shall assume his/her duties
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Convergence Report 2016 - Technical annex
Chapter 6 - Poland
According to Article 203(1) of Poland’s
Constitution, the Supreme Audit Office
(Najwyższa Izba Kontroli (NIK)) is entitled to
examine the NBP's activities as regards its legality,
economic prudence, efficiency and diligence. The
NIK controls are not performed in the capacity of
an independent external auditor, as laid down in
Article 27.1 of the ESCB/ECB Statute and thus,
should for legal certainty reasons be clearly
defined so as to respect Article 130 of the TFEU
and Article 7 of the ESCB/ECB Statute.
Furthermore, the provision's relationship with
article 69.1 of the NBP Act is also unclear. The
relevant provision of the Constitution is therefore,
incompatible and needs to be adapted in order to
comply with Article 130 of the TFEU and Article
7 of the ESCB/ECB Statute.
6.1.3. Prohibition of monetary financing and
privileged access
Limitation of the NPB's activities on the
territory of the Republic of Poland (article 2.3
of the NBP Act);
definition and implementation of monetary
policy (Articles 227(1) and (5) of the
Constitution, Articles, 3(2)(5), 12, 23, 38-50a,
and 53 of the NBP Act);
holding of foreign reserves; management of
foreign exchange and the definition of foreign
exchange policy (Articles 3(2)(2),
3(2)(3),
17(4)(2), 24 and 52 of the NBP Act);
competences of the ECB and of the EU for
banknotes and coins (Article 227(1) of the
Constitution and Articles 4, 31 to 37 of the
NBP Act). The NBP shall exercise its
responsibility for issuing the national currency
as part of the ESCB.
appointment of independent auditors - Article
69(1) of the NBP Act foresees that NBP
accounts are examined by external auditors.
The NBP Act does not take into account that
the auditing of a central bank has to be carried
out by independent external auditors
recommended by the Governing Council and
approved by the Council. It is incompatible
with Article 27.1 of the ESCB/ECB Statute.
There are also some imperfections regarding:
non-recognition of the role of the ECB in the
functioning of the payment systems (Articles
3(2)(1) of the NBP Act);
non-recognition of the role of the ECB and of
the EU in the collection of statistics (Article
3(2)(7) and 23 of the NBP Act);
non-recognition of the role of the ECB in the
field of international cooperation (Article 5(1)
and 11(3) of the NBP Act);
6.1.5. Assessment of compatibility
Article 42 in conjunction with Article 3(2)(5) of
the NBP Act allow the NBP to extend refinancing
loans to banks in order to replenish their funding
and also extend refinancing to banks for the
implementation
of
bank
rehabilitation
programmes, subject to conditionality under
Article 42(4) of the same Act. Against this
background, the current wording of Article 42(3)
and (4) can be interpreted as allowing an extension
of refinancing loans to banks experiencing
rehabilitation proceedings which however could
end in insolvency of the banks concerned.
Effective preventive measures and more explicit
safeguards should be provided in the NBP Act to
clarify compatibility with Article 123 of the TFEU.
6.1.4. Integration in the ESCB
Objectives
Article 3(1) of the NBP Act sets the objectives of
the NBP. It refers to the economic policies of the
Government while it should make reference to the
general economic policies in the Union, with the
latter taking precedence over the former. This
constitutes an imperfection with respect to Article
127(1) of the TFEU and Article 2 of the
ESCB/ECB Statute.
Tasks
The incompatibilities in the NBP Act and in the
Polish Constitution in this area are linked to the
following ESCB/ECB/EU tasks:
As regards the independence of the central bank,
the prohibition on monetary financing and the
central bank integration into the ESCB at the time
of euro adoption, the legislation in Poland, in
particular the NBP Act and the Constitution of the
Republic of Poland are not fully compatible with
the compliance duty under Article 131 of the
TFEU.
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Convergence Report 2016 - Technical annex
Chapter 6 - Poland
Table 6.1:
Poland - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
2.6
0.0
6.3
3.1
4.0
2.5
2.0
2.5
3.9
2011
3.9
1.0
9.2
2.7
6.2
3.0
3.1
3.1
5.3
2012
3.7
0.9
8.0
4.2
4.4
3.5
2.8
3.4
5.3
2013
0.8
-0.3
-1.7
3.3
2.1
1.6
1.0
0.5
1.7
2014
0.1
-0.9
-1.2
-1.7
1.6
1.3
0.6
-0.3
1.2
(percentage change)
1)
2015
-0.7
-0.8
-4.9
-1.7
-0.3
1.7
0.3
-0.7
0.9
Apr-16
-0.5
-1.0
-4.8
0.9
-0.2
1.7
0.2
-0.5
1.1
weights
in total
2016
1000
300
135
74
177
315
792
1000
150
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
6.2.
PRICE STABILITY
6.2.2. Recent inflation developments
6.2.1. Respect of the reference value
The 12-month average inflation rate, which is used
for the convergence assessment, was below the
reference value at the time of the last convergence
assessment of Poland in 2014. It subsequently
followed a gradually declining path and fell below
zero in early 2015 reaching -0.7% at the end of
2015. In April 2016, the reference value was 0.7%,
calculated as the average of the 12-month average
inflation rates in Bulgaria, Slovenia and Spain plus
1.5 percentage points. The corresponding inflation
rate in Poland was -0.5%, i.e. 1.2 percentage points
below the reference value. The 12-month average
inflation rate is projected to remain below the
reference value in the months ahead.
Graph 6.1:
Poland - Inflation criterion since 2010
(percent, 12-month moving average)
5
4
3
2
Annual HICP inflation fell from a local high of
0.7% in February 2014 to zero in July 2014, before
turning negative in the next month. It then fell to a
minimum of -1.3% in February 2015, recovering
gradually to around -0.4% in early 2016. Falling
global oil prices were the main driver of these
changes. Food price deflation was determined by
declining global prices of agricultural products, a
good harvest in autumn 2014 in Poland and the
Russian embargo on imports of agri-food products
introduced in August 2014. Relative stability of the
zloty exchange rate in 2014 coupled with slow
price growth in Poland's trade partners has dented
import prices. Falling producer prices in industry
reflected a lack of cost pressure.
Graph 6.2:
Poland - HICP inflation
(y-o-y percentage change)
6
4
2
0
1
0
-1
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Poland
Reference value
-2
2010
2011
2012
Poland
2013
2014
Euro area
2015
Source: Eurostat.
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
In early 2014, core inflation (measured as HICP
inflation excluding energy and unprocessed food)
stayed broadly at the same level as HICP inflation.
It then fell slightly to 0.4% in July 2014 and since
then has remained relatively low, fluctuating in the
narrow corridor between 0.1% and 0.4%. Whereas
non-energy industrial goods prices continued to
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Table 6.2:
Poland - Other inflation and cost indicators
2010
HICP inflation
Poland
Euro area
Private consumption deflator
Poland
Euro area
Poland
Euro area
Labour productivity
Poland
Euro area
Nominal unit labour costs
Poland
Euro area
Imports of goods deflator
Poland
Euro area
1.8
6.0
9.5
7.0
5.8
2.6
-1.2
-2.0
-2.2
-2.6
3.3
-0.6
0.9
0.6
2.1
1.9
0.3
1.1
0.1
1.0
6.6
2.8
4.4
1.5
1.4
-0.1
1.3
0.6
1.5
0.3
3.2
1.6
10.1
2.2
4.9
2.3
5.3
2.2
3.4
1.9
3.6
1.8
0.4
1.1
1.7
1.7
-0.3
0.5
1.6
1.3
2.6
1.6
3.9
2.7
3.7
2.5
0.8
1.3
0.1
0.4
2011
2012
2013
2014
(annual percentage change)
2015
1)
-0.7
0.0
-1.2
0.2
3.1
1.2
2.2
0.6
0.9
0.7
-1.3
-3.6
2016
2)
0.0
0.2
0.0
0.4
3.8
1.5
3.0
0.5
0.8
0.9
0.0
-2.7
2017
2)
1.6
1.4
1.6
1.3
4.3
1.9
3.0
0.8
1.3
1.1
2.0
1.1
Nominal compensation per employee
1) Nominal compensation per employee and nominal unit labour costs for 2015 are estimates.
2) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
decline throughout 2014 and 2015, reflecting weak
inflationary pressures at global markets, processed
food prices only declined in 2015, in line with
falling prices of unprocessed food. On the other
hand, services price inflation remained positive,
given strong domestic demand growth. In the
absence of cost pressures, producer price inflation
in industry has remained negative since late 2012,
averaging -2.2% in 2015.
6.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
The fiscal stance, as measured by the change in the
structural balance, was tightened in 2014 and
slightly tightened in 2015. However, significant
pro-cyclical expansion is expected in 2016 to be
followed by a more limited fiscal expansion in
2017 as supplementary spending plans will not be
fully compensated by additional revenue measures.
Monetary policy, conducted within an inflation
targeting framework (
45
), was eased as the
Monetary Policy Council (MPC) cut its main
policy rate steadily from 4.75% in November 2012
to 2.5% in July 2013 in line with the subsequent
disinflation trend. The MPC again lowered the key
rate in October 2014 to 2.0% and further to 1.5%
in March 2015 as inflation decelerated and moved
into negative territory in 2015. The MPC then kept
the policy rate unchanged during the second half of
2015 and in early 2016.
Wages and labour costs
Real GDP increased to 3.3% in 2014 and 3.6% in
2015, slightly above estimates of potential output
growth of around 3% and well above the EU
average. Growth was mainly driven by private
consumption, benefiting from favourable labour
market conditions and comparatively low lending
rates, and to a lesser extent by investment. The
negative output gap is thus estimated to have
narrowed considerably. Real GDP growth is
projected to stay robust at 3.7% in 2016 and 3.6%
in 2017, supported by solid real wage growth,
further employment gains and recently announced
fiscal measures, with the output gap closing in
2016 and turning positive in 2017.
Employment has been consistently on the rise
since mid-2013 reaching the highest values since
comparable data are available at the end of 2015
(both in terms of absolute numbers as well as the
employment rate). In line with this, the
(
45
) Since the beginning of 2004, the NBP has pursued a
continuous inflation target of 2.5% with a permissible
fluctuation band of +/- 1 percentage point.
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Chapter 6 - Poland
unemployment rate has declined steadily since
2013 returning to pre-crisis (2008) level of around
7% by the end of 2015.
Following a period of sluggish growth, labour
productivity accelerated in 2014 and especially in
2015. Compensation per employee followed a
similar trend, with somewhat stronger growth in
2015 translating into nominal ULC growing by
0.9%, up from zero in the previous year (
46
). With
unemployment at record lows and expectations of
a further reduction, wage pressures are expected to
strengthen with ULC growth of over 1% in 2017.
Graph 6.3:
Poland - Inflation, productivity and wage trends
12
(y-o-y % change)
9
6
3
0
-3
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
administered prices was 1.2% in 2014 and 1.1% in
2015. The positive annual rate of growth of
administered prices was mainly related to hikes in
electricity prices in January 2014 and January
2015. Administered prices are set to decrease in
2016 following decreases in natural gas and
electricity prices.
The impact of tax measures on overall consumer
price developments was marginal in 2014 and
2015 as constant tax inflation lingered only some
0.4 pp. below headline inflation in 2014 while both
inflation measures were identical in 2015. In 2014
a marginally positive inflation contribution was
provided by higher excise duties on alcohol and
tobacco.
Medium-term prospects
Source: Eurostat, Commission services' Spring 2016 Forecast.
Looking ahead, inflation is expected to increase
only gradually. The low global inflation
environment and subdued commodity prices
should counteract positive impulses from the
expected gradual acceleration of wages. The
Commission services' Spring 2016 Forecast
projects annual HICP inflation to average 0.0% in
2016 and 1.6% in 2017.
Risks to the inflation outlook appear to be broadly
balanced. On the one hand, possible exchange rate
depreciation, for instance due to increased capital
outflows, could result in higher consumer price
growth. On the other hand, the outlook for global
growth, commodity prices and related price
pressures remains fragile.
The level of consumer prices in Poland was at
around 55% of the euro-area average in 2014. This
suggests potential for further price level
convergence in the long term, as income levels
(about 64% of the euro-area average in PPS in
2014) increase towards the euro-area average. On
the other hand, in the last decade the relatively fast
convergence in income level was actually
associated with divergence in comparative price
levels.
Medium-term inflation prospects in Poland will
hinge upon wage and productivity trends as well as
on the functioning of product markets. Further
structural measures to increase labour supply and
to facilitate the effective allocation of labour
market resources will play an important role in
alleviating potential wage pressures, resulting inter
alia from negative demographic developments. As
External factors
Although external trade represents a lower share of
GDP in Poland than in regional peers, prices of
imported goods and services play an important role
in domestic price formation. Imported inflation
(measured by the imports of goods deflator) has
stayed slightly negative since 2013. This was
driven by very low inflation globally, relative
stability of the zloty exchange rate and since late
2014 also the fall in global oil prices. The import
deflator is forecast to increase in 2016 compared to
previous year and turn positive in 2017.
Administered prices and taxes
Increases in administered prices (
47
), with a weight
of around 15% in the HICP basket (compared to
13% in the euro area), exceeded HICP inflation in
recent years. The average annual increase in
(
46
) Please note that recent quarterly figures would suggest a
different estimate for 2015.
(
47
) According to the Eurostat definition, administered prices in
Poland include
inter alia
water supply, refuse and sewerage
collection, electricity, gas, heat energy and certain
categories of passenger transport. For details, see
http://ec.europa.eu/eurostat/documents/272892/272989/HI
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
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Table 6.3:
Poland - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ calculations on the basis of the information in the programme.
Sources: Commission services, the 2016 Convergence Programme of Poland.
2)
1)
(as % of GDP unless indicated otherwise)
2012
-3.7
38.9
42.6
2.7
32.8
-1.0
-3.9
0.1
-4.0
54.0
1.6
0.4
2013
-4.0
38.4
42.4
2.5
32.8
-1.5
-3.4
0.0
-3.4
56.0
1.3
-1.2
2014
-3.3
38.9
42.2
1.9
33.0
-1.4
-2.8
-0.2
-2.6
50.5
3.3
-1.0
2015
-2.6
38.9
41.5
1.8
33.3
-0.8
-2.4
0.0
-2.3
51.3
3.6
-0.5
2016
-2.6
39.1
41.7
1.7
33.7
-0.9
-2.6
0.4
-3.0
52.0
3.7
0.0
2016
-2.6
-2.9
52.0
3.8
2017
-3.1
39.1
42.2
1.5
33.5
-1.5
-3.3
0.0
-3.3
52.7
3.6
0.4
2017
-2.9
-2.7
52.5
3.9
2018
-2.0
-2.1
52.0
4.0
2019
-1.3
-1.6
50.4
4.1
2010
-7.5
38.1
45.6
2.5
32.0
-5.0
-8.2
0.0
-8.2
53.3
3.7
1.4
2011
-4.9
38.8
43.6
2.5
32.5
-2.3
-6.0
0.0
-6.0
54.4
5.0
2.3
General government balance
to product markets, there is scope to enhance the
competitive environment, especially in the services
and energy sectors. At the macro level, a prudent
fiscal stance will be essential to contain
inflationary pressures.
6.3.
PUBLIC FINANCES
6.3.1. Recent fiscal developments
The general government deficit declined from
3.3% of GDP in 2014 to 2.6% in 2015. In
structural terms, the deficit also improved by 0.3
pp. to 2.3% of GDP in 2015. The ratio of total
government expenditure to GDP has followed a
downward trend since 2010. The ratio fell from
42.2% of GDP in 2014 to 41.5% in 2015. Debt
servicing costs decreased visibly, while investment
expenditure was on the rise. Total government
revenue remained at 38.9% of GDP in 2014 and in
2015.
In 2014, the deficit reduction was driven by both
an improvement in revenues and a small fall in
government expenditures. On the revenue side
VAT collection improved after the particularly
weak performance in the previous year, while a
better labour market situation supported stronger
personal income tax collection. Government
revenues from social contributions also increased,
due to re-direction from the second to the first
pension pillar, in the context of the reversal of the
1999 pension system reform made in 2013. On the
expenditure side, the improvement was mostly due
to the substantial fall in the costs of public debt
servicing. Moreover, the government maintained
the freeze in the wage fund of public sector
employees.
In June 2015, the Council decided to abrogate the
decision on the existence of an excessive deficit
according to Article 126(12) TFEU, thereby
closing the excessive deficit procedure for Poland
(
48
). While the general government deficit was
slightly above 3% of GDP in 2014, Poland was
eligible for abrogation under the Stability and
Growth Pact provisions concerning systemic
pension reforms - Article 2(7) of Regulation (EC)
1467/97. In particular, the total net costs in 2014 of
the 1999 systemic pension reform were estimated
at 0.4% of GDP. The Council considered them to
be sufficient to explain the excess of the deficit
over the 3% of GDP reference value in 2014.
(
48
) An overview of all excessive deficit procedures can be
found at: http://ec.europa.eu/economy_finance/economic_
governance/sgp/deficit/index_en.htm
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In 2015, the further decrease in the budget deficit
was driven by falling expenditures. In particular,
expenditures on compensation of employees
increased much below the rate suggested by
private sector wage dynamics helped by a
continued freeze of the wage bill for most central
government institutions. In addition, public debt
servicing costs continued to fall benefitting from
low interest rates. On the revenue side, social
contributions increased dynamically following
acceleration of wage and employment growth,
while both taxes on production and imports and
current taxes on income and wealth stayed at the
2014 level in relation to nominal GDP.
The significant fall of the general government debt
in 2014, down by more than 5 pp. to 50.4% of
GDP, is mainly explained by a large one-off
transfer of private pension fund assets. In 2015,
government debt increased to 51.3% of GDP.
6.3.2. Medium-term prospects
to deteriorate from 2¼% of GDP in 2015 to 3¼%
of GDP in 2017.
The general government debt-to-GDP ratio is
forecast to increase to 52.7% in 2017. The
projected debt figures are, however, subject to
considerable uncertainty in view of possible
valuation effects of the sovereign debt
denominated in foreign currency due to exchange
rate fluctuations.
The 2016 Convergence Programme was submitted
on 28 April 2016. It foresees an increase in the
structural budget balance to 3.1% of GDP in 2016
and its gradual decrease in subsequent years. The
Medium Term Objective of a structural deficit of
not more than 1% of GDP is not expected to be
reached within the programme period (2019). The
nominal balance is expected in the Programme to
be in a deficit of 2.6% of GDP in 2016, widening
to 2.9% of GDP in 2017 and gradually declining
thereafter. These projections are in line with the
Commission services' Spring 2016 Forecast as
regards 2016 and more favourable thereafter, in
particular due to a slightly more optimistic
macroeconomic scenario underpinning these
budgetary projections. Based on the Commission's
assessment of the 2016 Convergence Programme,
there is a risk that Poland will not comply with the
provisions of the Stability and Growth Pact, as
there is a risk of a significant deviation from the
recommended adjustment both in 2016 and, under
unchanged policies, in 2017. Therefore further
measures will be needed to ensure compliance in
2016 and 2017. Further details can be found in the
Assessment of the 2016 Convergence Programme
for Poland (
49
).
As far as the national fiscal framework is
concerned – which refers to numerical fiscal rules,
medium-term budgetary frameworks, independent
fiscal institutions, and budgetary procedures –
Poland fares relatively well, but lacks an
independent
fiscal
council.
Medium-term
budgetary planning is based on the Multiannual
State Financial Plan which covers four years and
constitutes a basis for the preparation of annual
budgets. There is a constitutional debt threshold
for the general government and a separate debt rule
for local governments. A new stabilising
expenditure rule covering almost the entire general
government was introduced at the end of 2013. In
(
49
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
The 2016 budget was adopted only on 3 March
2016, as following the elections the new
government amended the draft budget submitted to
the Parliament by the outgoing government. The
key amendment on the expenditure side was an
increase of around 0.9% of GDP to finance the
new child benefit. Revenues were also adjusted
upwards. One-off revenue (around 0.5% of GDP)
from the sale of mobile internet frequencies was
moved to the 2016 budget, from the 2015 budget
(which was also amended in December 2015). In
addition, revenues from two new taxes (on assets
of financial institutions and the retail sector)
amounting to around 0.4% of GDP were
incorporated in the planned revenue. Only the tax
on assets of financial institutions was implemented
from February 2016, while the other remained in
the stage of consultations as of April. The
Commission services' Spring 2016 Forecast
projects a general government deficit of 2.6% of
GDP in 2016, broadly in line with the level
specified in the budget law, while assuming no
revenue from the planned retail sector tax.
The general government deficit is projected to
widen to 3.1% of GDP in 2017 under the no-
policy-change scenario. The increase of the
projected deficit is mainly explained by additional
costs of the child benefit (in 2016 it entered into
force only in the second quarter), legislated
decrease in VAT rates and lack of other one-off
revenues in 2017. The structural deficit is expected
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spite of the existence of these important elements
of the framework, its credibility is compromised
by frequent changes to the rules. Moreover, Poland
is currently the only EU Member State without an
independent fiscal council or plans to create one.
Typically remits of such fiscal councils cover
carrying out ex ante and ex post monitoring of
compliance with fiscal rules, assessment of
macroeconomic and budgetary forecasts as well as
analysis of the long-term sustainability of public
finances.
by factors such as a credit rating downgrade,
benign global risks and compression of risk
premia. Inter-day exchange rate volatility during
this period was highest in February 2016 and
declined since then. Poland has benefited from a
Flexible Credit Line arrangement with the IMF
since 2009. Compared to April 2014, the exchange
rate of the zloty against the euro was around 2.9%
weaker in April 2016.
Graph 6.5:
Poland - 3-M Wibor spread to 3-M Euribor
(basis points, monthly values)
500
6.4.
EXCHANGE RATE STABILITY
400
The Polish zloty does not participate in ERM II.
Since April 2000, Poland operates a floating
exchange rate regime, with the NBP preserving the
right to intervene in the foreign exchange market,
if it deems this necessary, in order to achieve the
inflation target (
50
).
Graph 6.4:
Poland - PLN/EUR exchange rate
(monthly averages)
5.0
300
200
100
0
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat.
4.5
4.0
3.5
3.0
2010
2011
2012
2013
2014
2015
2016
International reserves held by the NBP increased
gradually from around EUR 77 billion by end-
2013 to EUR 82 billion by end-2014 and
fluctuated around EUR 90 billion during 2015 and
at beginning of 2016. The reserve-to-GDP ratio
was at around 20% by end-2015. The level of
international reserves was mainly influenced by
sovereign debt management decisions, inflows of
EU funds and FX fluctuations.
Source: ECB.
The zloty broadly stabilised and predominantly
traded in the range of 4.1-4.2 PLN/EUR during
2013 and until end of 2014. Zloty volatility
increased thereafter. It weakened rather sharply in
December 2014 along regional peers. It
appreciated rather steeply in the beginning of 2015
following the Swiss National Bank's decision to let
the CHF appreciate, touching below 4 PLN/EUR
in April supported by accelerating economic
growth, ECB easing and the end of the monetary
easing cycle in Poland. The zloty then depreciated
gradually in the second half of 2015, affected by
domestic political uncertainty, and then rather
sharply in January 2016 following the S&P credit
rating downgrade, reaching 4.5 PLN/EUR.
Exchange rate volatility in early 2016 was driven
( ) As from beginning of 2004, the inflation target of the NBP
is set as annual consumer price index growth of 2.5% (with
a permissible fluctuation band of ± 1 percentage point).
50
Short-term interest rate differentials vis-à-vis the
euro area remained in the range between 200 and
250 basis points during 2014. They started to
decline at the end-2014 hitting a low of 165 basis
points in early 2015, reflecting considerable
monetary policy easing by the NBP, which
gradually cut its key reference rate by 325 basis
points between November 2012 and March 2015.
Interest rate differentials have been widening
gradually since then, reflecting mainly additional
monetary policy easing by the ECB as well as
domestic political uncertainties. At the cut-off date
of this report, the 3-month spread vis-à-vis the
euro area stood at around 190 basis points.
6.5.
LONG-TERM INTEREST RATES
Long-term interest rates in Poland used for the
convergence examination reflect secondary market
yields on a single benchmark government bond
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Chapter 6 - Poland
with a residual maturity of close to but below 10
years.
The Polish 12-month average long-term interest
rate relevant for the assessment of the Treaty
criterion was 2 percentage points below the
reference value at the time of the last convergence
assessment in 2014. It declined further from above
4% at the beginning of 2014 to below 4% at the
end of 2014 due to improving market confidence.
Graph 6.6:
Poland - Long-term interest rate criterion
(percent, 12-month moving average)
12
10
8
6
4
2
0
Jan-10
beginning of 2015, reflecting improved investor
sentiment towards the country, strong economic
growth as well as a substantial fall in domestic
inflation. Long-term interest rates increased again
during 2015 and fluctuated around 3% as risk
appetite in global financial markets dwindled while
perceptions of domestic political risks increased.
As a result, long-term interest rate spreads vis-à-
vis the German benchmark bond increased to
around 280 basis points in early 2016 (
51
).
6.6.
ADDITIONAL FACTORS
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Poland
Reference value
Source: Commission services.
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product and financial market
integration – gives an important indication of a
Member State's ability to integrate into the euro
area without difficulties.
In November 2015, the Commission published its
third Alert Mechanism Report (AMR 2016) (
52
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Poland exceeded the
indicative threshold for one out of fourteen
indicators, i.e. the international investment
position. In line with the conclusions of the AMRs
2012-2016, Poland has not been subject to in-depth
reviews in the context of the MIP.
6.6.1. Developments
payments
of
the
balance
of
It went further down to around 3% in early 2015. It
stayed around 2.7% during 2015 but increased
slightly at the beginning of 2016 due to changing
investors' risk perceptions, following S&P credit
rating downgrade. In April 2016, the latest month
for which data are available, the reference value,
given by the average of long-term interest rates in
Bulgaria, Slovenia and Spain plus 2 percentage
points, stood at 4.0%. In that month, the 12-month
moving average of the yield on the Polish
benchmark bond stood at 2.9%, i.e. 1.1 percentage
points below the reference value.
Graph 6.7:
Poland - Long-term interest rates
(percent, monthly values)
8
6
4
2
0
2010
2011
2012
Poland
2013
2014
Germany
2015
2016
Poland’s external balance (i.e. the combined
current and capital account) has been positive
since 2013, mainly reflecting a further
improvement in the trade balance, which shifted
into surplus. Although export growth remained
solid, the trade in goods deficit widened somewhat
in 2014 primarily due to strengthening imports
reflecting a rebound in domestic demand. Lower
prices of imported energy commodities helped the
trade balance turn positive in 2015. The narrowing
of the current account deficit was also supported
(
51
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
(
52
)
http://ec.europa.eu/europe2020/pdf/2016/ags2016_al
ert_mechanism_report.pdf
Source: Eurostat.
Long-term interest rates declined from around
4.1% in early 2014 to just above 2% at the
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Table 6.4:
Poland - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
-5.2
-3.5
1.4
-3.2
0.2
1.9
-3.3
-5.2
-2.6
-3.2
-0.6
1.2
-6.4
-1.9
22.4
17.7
65.4
-62.4
2012
-3.7
-2.1
1.5
-3.1
0.0
2.2
-1.5
-2.3
-1.2
-3.9
0.6
2.2
-4.5
-0.8
21.0
17.7
72.1
-65.4
2013
-1.3
-0.1
1.9
-3.0
-0.1
2.3
1.0
-1.1
-0.8
0.0
-0.5
0.2
-1.3
-2.1
19.0
18.5
70.6
-69.0
2014
-2.0
-0.8
2.1
-3.2
-0.1
2.4
0.4
-0.8
-2.0
0.4
0.7
0.1
-0.9
-1.2
20.4
19.1
71.0
-68.5
2015
-0.2
0.5
2.3
-2.8
-0.2
2.4
2.1
1.8
-0.7
0.7
1.6
0.2
1.6
-0.4
20.5
20.6
70.3
-61.9
-5.4
-3.0
0.9
-3.3
0.0
1.8
-3.6
-6.4
-1.8
-6.1
-1.8
3.2
-9.6
-2.8
21.3
16.5
65.8
-65.1
of which: Direct investment
Portfolio investment
Other investment
3)
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, National Bank of Poland.
by consistently strong performance of services
exports. At the same time, the negative primary
income balance remained broadly stable in
2013-2015 while the secondary income balance
was close to zero.
As far as the saving-investment balance is
concerned, gross national saving (as a percentage
of GDP) kept increasing after 2013. In 2014, the
increase was driven by rising gross saving of the
corporate sector, which was partially offset by
lower saving by households and the government.
In 2015, gross national saving increased further as
households started to increase their savings again.
At the same time, gross fixed capital formation (as
a percentage of GDP) increased in 2014 and
remained relatively stable in 2015, after a fall in
2013. This was driven by both public and private
sectors investment spending. However, the private
sector investment-to-GDP ratio in Poland remains
below the level observed among its regional peers.
Poland's external competitiveness appears to have
remained solid. Poland's export performance was
very strong over the past two years with gains in
market shares. Strong cost-competitiveness has
been an important factor. Since the second half of
2014, both the nominal and real effective exchange
rate have followed a depreciation trend, with a
temporary reversal in the first quarter of 2015 and
then again in early 2016.
Graph 6.8:
Poland - Saving and investment
(in percent of GDP at market prices)
30
20
10
0
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
On the financing account of the balance of
payments, direct investment recorded a net inflow
of 2.0% of GDP in 2014 and 0.7% of GDP in
2015. The portfolio investment showed net
outflows in 2014 and 2015, primarily due to
increased residents’ holdings of portfolio debt and
equity abroad and marginal inflows of non-
residents' financing at the sovereign debt market.
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Table 6.5:
Poland - Market integration
2010
Trade openness
1)
2011
44.8
25.2
1.6
62
41
2.1
95.4
2.5
2012
45.9
25.1
2.9
55
41
1.8
89.0
2.6
2013
46.9
25.6
4.6
45
42
1.2
84.8
2.6
2014
48.4
27.0
3.3
28
43
0.7
85.8
2.4
2015
49.4
27.8
3.5
25
41
1.5
88.1
2.5
(%)
4)
42.2
24.1
1.3
59
39
1.7
100.0
2.6
6)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
The other investment also registered net outflows
in 2014 and 2015.
Graph 6.9:
Poland - Effective exchange rates
120
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
According to the Commission services' Spring
2016 Forecast, the external balance is expected to
gradually deteriorate to 0.9% of GDP in 2016 and
0.4% of GDP 2017 as imports are foreseen to
outpace exports.
6.6.2. Market integration
110
100
90
80
2010
2011
NEER
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
Total gross external debt increased somewhat from
70.6% of GDP in 2013 to 71% of GDP in 2014 but
decreased to 70.3% of GDP in 2015, while the
negative net international investment position
(NIIP) narrowed significantly from 69% of GDP in
2013 to 61.9% of GDP in 2015. Although this is
well beyond the indicative threshold set in the MIP
(-35% of GDP), a major part of the NIIP consists
of the accumulated stock of foreign direct
investments. Since May 2009, the stability of the
balance of payments has been supported by
precautionary access to the IMF's Flexible Credit
Line (FCL) arrangement. As a step towards a
gradual exit from the arrangement, in January 2015
and then again in January 2016 the size of the FCL
was lowered due to strong fundamentals and
abating external risks.
Poland's economy is well integrated with the euro
area through both trade and investment linkages.
Following a decrease in 2008-2009 as a result of
the crisis, trade openness increased in the
following years, reaching some 49% of GDP in
2015. The share of trade with euro-area partners
expressed in percentage of GDP has been
increasing in recent years, reaching 28% in 2015.
Within the euro area, Poland mainly trades with
Germany, the Netherlands, Italy and France, while
outside the euro area its main trading partners are,
the Czech Republic, Russia and the United
Kingdom.
FDI inflows to Poland have mainly originated in
Germany,
the
Netherlands,
France
and
Luxembourg, which together provided over 50%
of the FDI stock at the end of 2014. The significant
size and growth of the domestic market as well as
good access to large regional markets have
supported the attractiveness of the country for FDI.
Concerning the business environment, Poland
performs in general worse than most euro-area
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Chapter 6 - Poland
Member States in international rankings.
Moreover, according to the May 2015 Internal
Market Scoreboard, Poland's transposition deficit
of EU Directives was at 1.5% which is
substantially above the target (0.5%) proposed by
the European Commission in the Single Market
Act (2011).
The current segmentation with a substantial share
of temporary employment of the Polish labour
market affects productivity and the accumulation
of human capital in the longer term. Shortcomings
in the education system and in the design of active
labour market policies lead to mismatches between
labour demand and supply. Poland has recently
taken some measures to tackle labour market
segmentation. The Polish labour market can be
considered as rather flexible in terms of
employment protection (as measured by the 2013
OECD employment protection indicator, while
collective bargaining has a stronger impact on
wage formation in sectors dominated by state
enterprises, such as mining. Preferential sector-
specific social security arrangements — in
particular the highly subsidised pension systems
for farmers and miners — also reduce labour
mobility and have high budgetary costs. Outward
migration flows, especially after EU accession in
2004, were substantial, while domestic labour
mobility is hampered by factors such as housing
policies, transport infrastructure, access to child
care and skills mismatches.
Graph 6.10:
Poland - Foreign ownership and concentration
in the banking sector
70
(in percent, weighted averages)
60
50
The capitalisation of banks continued to improve
reaching a capital adequacy ratio (CAR) of 14.9%
in 2014. Profitability remained high in 2014, with
return on equity (ROE) at around 10%, however, it
decreased to 7% in Q3 2015, mainly due to record
low interest rates and higher contributions to the
Bank Guarantee Fund. The new tax on financial
sector assets is expected to weigh on the
profitability of the banking sector, which could
also be negatively affected by pending proposals to
convert foreign-currency denominated loans. The
non-performing loans ratio broadly followed the
euro-area trend and deteriorated during the crisis to
about 6�½% in 2009-2010, up from 3.9% in 2007,
before dropping to 5.3% in Q3 2015.
According to Eurostat, real house prices in Poland
declined by over 28% between 2008 and 2013.
House prices started to recover in 2014 and
increased by 2.3% in 2015. Investment in
dwellings has remained relatively stable at around
2.5% of GDP.
Graph 6.11:
Poland - Selected banking sector soundness
indicators
%
18
16
14
12
10
8
6
4
2
0
PL, 2010
Return on equity
PL, Q3-15
Capital adequacy
EA, 2010
EA, Q3-15
Non performing loans
Source: ECB, EC calculations.
40
30
20
10
0
PL, 2010
PL, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
Source: ECB, Structural financial indicators.
Poland's financial sector is well integrated within
the overall EU financial system. In 2015, around
64% of the Polish banking sector's assets were
owned by foreign financial institutions,
predominantly from EU Member States.
Concentration in the Polish banking sector has
remained close to the euro-area average. The share
of total assets owned by the five largest lenders
amounted to 48%.
The financial system in Poland is smaller relative
to GDP than that of the euro area. Credit to the
private economy (households and non-financial
corporations) has increased to 49% of GDP in
2014 from 39% in 2007. The share of foreign-
currency denominated loans remains significant
(around 30% of the total loan stock), particularly
in the mortgage loan segment where around 40%
of housing loans are denominated either in Swiss
franc or euro. Nevertheless, the share of foreign-
currency denominated loans has been gradually
declining, as most banks do not offer them since
2009.
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Graph 6.12:
Poland - Recent development of the financial
system relative to the euro area
180
(in percentage of GDP)
160
140
120
100
80
60
40
20
0
PL, 2010
PL, 2015
EA, 2010
EA, 2015
Debt securities
Credit to non-financial corporations
Stock market capitalisation
Credit to households
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
The total capitalisation of the Warsaw Stock
Exchange represented 28% of GDP in 2015, down
from a pre-crisis record high of 45% of GDP in
2007, following the decrease in private pension
funds involvement in the capital market. The debt
securities market is one of most liquid in the
region but remains small in comparison with the
euro area (54% against 158% of GDP). The market
is dominated by government bonds (over 90%
share) while corporate bonds account for only
about 7% of the outstanding amounts.
Consolidated private sector debt went up from
around 70% to close to 79% of GDP in 2015,
significantly below the euro-area average.
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7.
7.1.
ROMANIA
LEGAL COMPATIBILITY
7.1.1. Introduction
The Banca Naţională a României (BNR) is
governed by Law No. 312 on the Statute of the
Bank of Romania of 28 June 2004 (hereinafter 'the
BNR Law') which entered into force on 30 July
2004.
The BNR law has not been amended since the
Convergence Report 2014. Therefore, the
comments provided in the Convergence Report
2014 are largely repeated in this year's assessment.
7.1.2. Central Bank independence
institutional independence is also protected vis-à-
vis national, foreign and EU institutions, bodies,
offices or agencies. Moreover, Article 3 should
expressly oblige the government not to seek to
influence the members of the BNR's decision-
making bodies in the performance of their tasks.
The BNR Law should be supplemented by rules
and procedures ensuring a smooth and continuous
functioning of the BNR in case of the Governor's
termination of office (e.g. due to expiration of the
term of office, resignation or dismissal). So far,
Article 33(5) of the BNR Law provides that in case
the Board of BNR becomes incomplete, the
vacancies shall be filled following the procedure
for the appointment of the members of the Board
of BNR. Article 35(5) of the BNR Law stipulates
that in case the Governor is absent or incapacitated
to act, the Senior Deputy Governor shall replace
the Governor.
Pursuant to Article 33(9) of the BNR Law, the
decision to recall a member of the BNR Board
(including the Governor) from office may be
appealed to the Romanian High Court of Cassation
and Justice. However, Article 33(9) of the BNR
Law remains silent on the right of judicial review
by the Court of Justice of the European Union in
the event of the Governor's dismissal provided in
Article 14.2 of the ESCB/ECB Statute. This
imperfection should be corrected.
Article 33(7) of the Law provides that no member
of the Board of BNR may be recalled from office
for other reasons or following a procedure other
than those provided in Article 33(6) of this Law.
Law 161/2003 on certain measures for
transparency in the exercise of public dignities,
public functions and business relationships and for
the prevention and sanctioning of corruption and
the Law 176/2010 on the integrity in the exercise
of public functions and dignities define the
conflicts of interest incompatibilities applicable to
the Governor and other members of the Board of
the BNR and require them to report on their
interests and wealth. For the sake of legal
certainty, it is recommended to remove this
imperfection and provide a clarification that the
sanctions for the breach of obligations under those
Laws do not constitute extra grounds for dismissal
of the Governor of the Board of BNR, in addition
to those contained in Article 33 of the BNR Law.
As regards central bank independence, a number of
incompatibilities and imperfections have been
identified with respect to the TFEU and the
ESCB/ECB Statute.
According to Article 33(10) of the BNR Law, the
Minister of Public Finances and one of the State
Secretaries in the Ministry of Public Finances may
participate, without voting rights, in the meetings
of the BNR Board. Although a dialogue between a
central bank and third parties is not prohibited as
such, this dialogue should be constructed in such a
way that the Government should not be in a
position to influence the central bank's decision-
making in areas for which its independence is
protected by the Treaty. The active participation of
the Minister and one of the State Secretaries, even
without voting right, in discussions of the BNR
Board where BNR policy is set could structurally
offer to the Government the possibility to
influence the central bank when taking its key
decisions. Against this background, Article 33(10)
of the BNR Law is incompatible with Article 130
of the TFEU.
Article 3(1) of the BNR Law needs to be amended
with a view to ensuring full compatibility with
Article 130 of the TFEU and Article 7 of the
ESCB/ECB Statute. Pursuant to Article 3(1) of the
BNR Law, the members of the BNR's decision-
making bodies shall not seek or take instructions
from public authorities or from any other
institution or authority. First, for legal certainty
reasons, it should be clarified that the BNR's
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According to Articles 21 and 23 of the Law
concerning the organisation and functioning of the
Court of Auditors (No 94/1992), the Court of
Auditors is empowered to control the
establishment, management and use of the public
sector’s financial resources, including BNR's
financial resources, and to audit the performance in
the management of the funds of the BNR. Those
provisions constitute an imperfection as regards
article 27.1 of the ESCB/ECB Statutes and thus,
for legal certainty reasons, it is recommended to
define clearly in the Law that the scope of audit by
the Court of Auditors, is without prejudice to the
activities of the BNR’s independent external
auditors.
Article 43 of the BNR Law provides that the BNR
must transfer to the State budget an 80% share of
the net revenues left after deducting expenses
relating to the financial year, including provisions
for credit risk, and any losses relating to previous
financial years that remain uncovered. Such a
procedure could, in certain circumstances, be seen
as an intra-year credit, which negatively impacts
on the financial independence of the BNR. A
Member State may not put its central bank in a
position where it has insufficient financial
resources to carry out its ESCB tasks, and also its
own national tasks, such as financing its
administration and own operations. Article 43(3)
of the BNR Law also provides that the BNR sets
up provisions for credit risk in accordance with its
rules, after having consulted the Ministry of Public
Finance. The central bank must be free to
independently create financial provisions to
safeguard the real value of its capital and assets.
Article 43 of the BNR Law is incompatible with
Article 130 of the TFEU and Article 7 of the ECB/
ESCB Statute and should, therefore, be adapted, to
ensure that the above arrangements do not
undermine the ability of the BNR to carry out its
tasks in an independent manner.
7.1.3. Prohibition of monetary financing and
privileged access
and thereby would breach the prohibition of
monetary financing and be incompatible with
Article 123 of the TFEU. Article 26 of the BNR
Law should be amended to avoid such a lending
operation.
Articles 6(1) and 29(1) of the BNR Law prohibit
the direct purchases by the BNR in the primary
market of debt instruments issued by the State,
national and local public authorities, autonomous
public enterprises, national corporations, national
companies and other majority state-owned
companies. Article 6(2) of the BNR Law extends
this prohibition to the debt instruments issued by
other bodies governed by public law and public
undertakings of other EU Member States. Article
7(2) of the BNR Law prohibits the BNR from
granting overdraft facilities or any other type of
credit facility to the State, central and local public
authorities,
autonomous
public
service
undertakings,
national
societies,
national
companies and other majority state owned
companies. Article 7(4) of the BNR Law extends
this prohibition to other bodies governed by public
law and public undertakings of Member States.
These provisions do not fully mirror the entities
listed in Article 123 of the TFEU (amongst others,
a reference to Union institutions is missing) and,
therefore, have to be amended.
Pursuant to Article 7(3) of the BNR Law, majority
state-owned credit institutions are exempted from
the prohibition on granting overdraft facilities and
any other type of credit facility under Article 7(2)
of the BNR Law and benefit from loans granted by
the BNR in the same way as any other credit
institution eligible under the BNR's regulations.
The wording of Article 7(3) of the BNR Law is
incompatible with the wording of Article 123(2) of
the TFEU, which only exempts publicly owned
credit institutions “in the context of the supply of
reserves by central banks”, and should be aligned.
As noted above in point 8.1.2., Article 43 of the
BNR Law provides that the BNR shall transfer to
the State on a monthly basis 80% of its net
revenues left after deduction of the expenses
related to the financial year and the uncovered loss
of the previous financial years. This provision does
not rule out the possibility of an intra-year
anticipated profit distribution under circumstances
where the BNR would accumulate profit during
the first half of a year, but suffer losses during the
second half. The adjustment would be made by the
State only after the closure of the financial year
According to Article 26 of the BNR Law, the BNR
under exceptional circumstances and only on a
case-by-case basis may grant loans to credit
institutions which are unsecured or secured with
assets other than assets eligible to collateralise the
monetary or foreign exchange policy operations of
the BNR. It cannot be excluded that such lending
results in the provision of solvency support to a
credit institution that is facing financial difficulties
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and would thus imply an intra-year credit to the
State, which would breach the prohibition on
monetary financing. This provision is, therefore,
also incompatible with the Article 123 of the
TFEU and has to be amended.
7.1.4. Integration in the ESCB
Objectives
non-recognition of the role of the ECB and of
the Council in the appointment of an external
auditor (Article 36(1) of the BNR Law);
absence of an obligation to comply with the
ESCB/ECB regime for the financial reporting
of NCB operations (Articles 37(3) and 40 of
the BNR Law);
non-recognition of the ECB's right to impose
sanctions (Article 57 of the BNR Law).
7.1.5. Assessment of compatibility
Pursuant to Article 2(3) of the BNR Law, the
secondary objective of the BNR is to support the
State’s general economic policy. Article 2(3) of the
BNR Law contains an imperfection as it should
contain a reference to the general economic
policies in the Union as per Article 127(1) of the
TFEU and Article 2 of the ESCB/ECB Statute.
Tasks
As regards the independence of the BNR, the
prohibition on monetary financing and the BNR's
integration into the ESCB at the time of euro
adoption, the legislation in Romania, in particular
the BNR Law, is not fully compatible with the
compliance duty under Article 131 of the TFEU.
The incompatibilities in the BNR Law are linked
to the following ESCB/ECB tasks:
definition of monetary policy and monetary
functions, operations and instruments of the
ESCB (Articles 2(2)(a), 5, 6(3), 7(1), 8, 19, 20
and 22(3) and 33(1)(a) of the BNR Law);
conduct of foreign exchange operations and the
definition of foreign exchange policy (Articles
2(2)(a) and (d), 9 and 33(1)(a) of the BNR
Law);
holding and management of foreign reserves
(Articles 2(2)(e), 9(2)(c), 30 and 31 of the BNR
Law);
right to authorise the issue of banknotes and the
volume of coins (Articles 2(2)(c), 12 to 18 of
the BNR Law);
non-recognition of the role of the ECB and of
the Council in regulating, monitoring and
controlling foreign currency transactions
(Articles 10 and 11 of the BNR Law);
lack of reference to the role of the ECB in
payment systems (Articles 2(2)(b), 22 and
33(1)(b) of the BNR Law).
There are also imperfections regarding the:
non-recognition of the role of the ECB and the
EU in the collection of statistics (Article 49 of
the BNR Law);
7.2.
PRICE STABILITY
7.2.1. Respect of the reference value
Graph 7.1:
Romania - Inflation criterion since 2010
(percent, 12-month moving average)
8
6
4
2
0
-2
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Romania
Reference value
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
The 12-month average inflation rate, which is used
for the convergence assessment, was above the
reference value at the time of the last convergence
assessment of Romania in 2014. Average annual
inflation has declined steadily since then, moving
into negative territory since October 2015 and
gradually falling to -1% in early 2016. In April
2016, the reference value was 0.7%, calculated as
the average of the 12-month average inflation rates
in Bulgaria, Slovenia and Spain plus 1.5
percentage points. The average inflation rate in
Romania during the 12 months to April 2016
was -1.3%, i.e. 2.0 percentage points below the
reference value. It is projected to remain well
below the reference value in the months ahead.
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Table 7.1:
Romania - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
6.1
3.5
7.6
2.9
10.4
4.1
6.4
1.8
5.4
2011
5.8
3.3
9.3
5.4
7.5
3.5
5.0
3.8
7.6
2012
3.4
2.4
6.9
0.6
3.5
4.2
3.3
3.2
5.3
2013
3.2
2.0
4.1
6.4
2.3
2.6
2.3
3.0
6.0
2014
1.4
1.6
2.3
-0.7
0.2
3.1
1.7
1.1
2.0
(percentage change)
1)
2015
-0.4
1.0
-2.7
-3.4
-1.6
2.2
0.7
1.2
1.6
Apr-16
-1.3
0.3
-3.3
-5.2
-3.2
2.0
-0.1
2.0
0.7
weights
in total
2016
1000
252
119
154
213
262
727
1000
138
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
7.2.2. Recent inflation developments
Graph 7.2:
Romania - HICP inflation
(y-o-y percentage change)
9
Annual HICP inflation has been on a downward
path over the past two years, mainly driven by
successive VAT cuts and low global oil prices,
though underlying price pressures have been
building amid strong domestic demand supported
by fiscal stimulus and high wage growth. It
dropped rapidly from around 4.5% at the
beginning of 2013 to just above 1% in September
2013 and fluctuated between 1% and 2% for most
of 2014. The considerable decline in 2014 was
attributable to several factors: (i) the 15 pp.
reduction of the VAT rate for flour and bakery
products from September 2013, (ii) the abundant
harvest in 2014, (iii) falling global energy and oil
prices and (iv) disinflationary pressures stemming
from a persistently negative output gap. Inflation
developments in 2015 and over the forecast
horizon (2016-2017) are markedly influenced by
fiscal policy, in particular by the successive
reductions of the VAT rates for different
categories of products. After falling to below 1%
in the first months of 2015, inflation moved into
negative territory in June 2015 (-0.9%) following
the cut of the VAT rate for the remaining food
products from 24% to 9%.
The annual HICP inflation rate has been negative
since then, reaching a historical low of -2.6% in
April 2016. The main reasons for the steep fall in
early 2016 were the reduction of the standard VAT
rate by 4 pp. from January 2016 and persistently
low global oil prices.
6
3
0
-3
2010
2011
2012
Romania
2013
2014
2015
Euro area
Source: Eurostat.
Core inflation (measured as HICP inflation
excluding energy and unprocessed food) declined
sharply by almost 2 pp. in the second half of 2013
and stabilised around 1.6% in the first half of
2014. The main drivers were slowing inflation for
services and processed food. Annual core inflation
increased slightly to 2% in the last quarter of 2014
as the impact of the VAT cut for flour and bakery
products wore out. In the second half of 2015,
following the cut of the VAT rate for the
remaining food products, core inflation dropped
below zero, but started a modest recovery as of
November 2015. It again turned negative in early
2016, following the cut in the standard VAT rate.
Annual average producer price inflation for total
industry has been negative since the last quarter of
2014.
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Table 7.2:
Romania - Other inflation and cost indicators
2010
HICP inflation
Romania
Euro area
Private consumption deflator
Romania
Euro area
Romania
Euro area
Labour productivity
Romania
Euro area
Nominal unit labour costs
Romania
Euro area
Imports of goods deflator
Romania
Euro area
5.7
6.0
6.0
7.0
7.5
2.6
-6.2
-2.0
-1.8
-2.6
2.4
-0.6
-5.8
0.6
3.5
1.9
-0.6
1.1
3.1
1.0
-0.5
2.8
1.9
1.5
5.7
-0.1
4.4
0.6
2.1
0.3
7.2
1.6
1.9
2.2
4.2
2.3
-4.1
2.2
4.5
1.9
9.4
1.8
2.6
1.1
3.8
1.7
1.2
0.5
5.3
1.3
6.1
1.6
5.8
2.7
3.4
2.5
3.2
1.3
1.4
0.4
2011
2012
2013
2014
(annual percentage change)
2015
-0.4
0.0
1.2
0.2
3.2
1.2
4.7
0.6
-1.4
0.7
-2.3
-3.6
2016
1)
-0.6
0.2
0.2
0.4
6.9
1.5
4.2
0.5
2.5
0.9
-3.4
-2.7
2017
1)
2.5
1.4
1.8
1.3
6.2
1.9
3.8
0.8
2.3
1.1
1.2
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
7.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
Economic growth has been strong over the past
two years. Romania's economy expanded by 3.0%
in 2014, the drivers of growth switching gradually
from net exports to domestic demand. Real GDP
growth accelerated further to 3.8% in 2015, on the
back of surging domestic demand, while net
exports contributed negatively to growth. Private
consumption was strong, particularly supported by
a cut of the VAT for food. Investment also
bounced back and returned to almost pre-crisis
growth rates in 2015. GDP growth is set to remain
above potential at 4.2% in 2016 and 3.7% in 2017,
supported by additional fiscal stimulus. The output
gap is estimated to close in 2016 and to turn
positive in 2017.
The fiscal stance, as measured by the change in the
structural balance, tightened in 2014 compared
with 2013, but loosened somewhat in 2015. The
structural budget balance was estimated at around
¼% of GDP in 2014 and �½% in 2015. The fiscal
stance is projected to become highly expansionary
and pro-cyclical, with structural deficit
deteriorating to 2¾% of GDP in 2016 and 3�½% of
GDP in 2017.
The BNR, operating within an inflation targeting
framework (
53
), cut the key policy rate by a total of
350 basis points between July 2013 and May 2015
in order to stimulate lending and domestic demand,
on the back of an improved inflation outlook. It
also reduced minimum reserve requirements with
the medium-term goal to align them gradually with
ratios prevailing in the rest of the EU.
Nevertheless, credit growth remained negative in
2014 but picked up in 2015 due to very strong
lending in domestic currency.
Wages and labour costs
In 2014 employment registered a positive growth
rate for the first time since the crisis, supported by
strong economic growth. Despite a drop in total
employment in 2015 on account of a significant
reduction of the number of self-employed persons,
employment is expected to remain broadly stable
in 2016 and 2017. Employment levels in Romania
remain, nonetheless, low compared to most other
EU Member States. The unemployment rate has
decreased to below 7% and is expected to remain
at the same level.
Strong economic growth and successive increases
of both public sector and minimum wages have
been driving nominal wages upwards since 2013,
(
53
) As from 2013, the BNR follows a flat multi-annual
inflation target of 2.5% (± 1pp.).
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and most notably in 2015. Labour productivity
growth slowed somewhat in 2014 but picked up
again in 2015 when it exceeded the increase in
nominal
compensation
per
employee.
Compensation per employee is expected to
increase further by around 7% in 2016 and slightly
above 6% in 2017. Wage growth has been
accelerating considerably (growing in double
digits in early 2016) and is forecast to outpace
productivity growth in 2016 and 2017, resulting in
significant increases in nominal unit labour costs
which are likely to weigh on competitiveness and
job creation.
Graph 7.3:
Romania - Inflation, productivity and wage trends
12
(y-o-y % change)
8
4
0
-4
-8
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
Administered prices and taxes
Changes in administered prices and indirect taxes
have
considerably
influenced
inflation
developments in recent years. Administered
prices (
54
) have a slightly larger weight in the
Romanian HICP basket than in the euro area
(13.7% compared to 12.9%). The average annual
increase in administered prices plunged from 6.0%
in 2013 to 2.0% in 2014 and 1.6% in 2015 due to
limited growth of electricity and gas prices,
although remaining substantially above average
headline inflation. The liberalisation of gas and
electricity prices in Romania had a rather moderate
impact on inflation, as the expected upward
pressure on energy and therefore on administered
prices was counterbalanced by low global
commodity prices.
Increases in fuel excise duties contributed
moderately to inflation in Romania in 2014 and
2015. HICP inflation measured at constant taxes
was above HICP inflation in the first quarter of
2014 due to the effect of the VAT cut on bread and
flour. Starting from the second quarter of 2014 this
trend was reversed and constant-tax inflation
remained below HICP inflation until the second
quarter of 2015. With the cut of the VAT rate for
food products, the two indicators diverged
significantly from each other. The gap between the
two increased to 3 pp. in June 2015 and has been
around 3 pp. until the end of 2015. HICP inflation
was pushed down further by a reduction of the
standard VAT rate by 4 pp. from January 2016.
These several VAT cuts decreased annual inflation
by 5 pp. in January 2016, as measured by the
constant-tax index (HICP-CT).
These measures had an overall effect on inflation
rate of over [X%] for 2015 and entail an additional
reduction in the inflation rate of around [X pp.] for
2016.
Medium-term prospects
Source: Eurostat, Commission services' Spring 2016 Forecast.
External factors
Due to the openness of the Romanian economy
and its deep integration into the world and the EU
economy, developments in import prices play a
significant role in domestic price formation. In
particular, energy and food commodity prices have
been a significant determinant of import price
inflation in Romania, given the large weight of
these categories in the Romanian HICP. Import
price inflation (measured by the imports of goods
deflator) was negative and significantly below
consumer price inflation in both 2014 and 2015.
Going forward, import price inflation is projected
to remain negative in 2016 and to pick up and turn
positive in 2017, remaining below consumer price
inflation.
Fluctuations of the leu have only moderately
influenced import price dynamics in recent years.
The nominal effective exchange rate (measured
against a group of 37 trading partners) appreciated
somewhat in the first half of 2014, but depreciated
slightly between mid-2014 and mid-2015,
reflecting mainly monetary policy easing. It
recovered again in the third quarter of 2015 and
has been on a slight upward path since then.
According to the Commission services' Spring
2016 Forecast, annual HICP inflation is projected
to remain slightly negative at -0.6% in 2016
mainly on account of the 4 pp. reduction of the
(
54
) According to the Eurostat definition, administered prices in
Romania include
inter alia
regulated electricity and gas
prices, regulated utility prices, medical products, postal
services and cultural services and part of public transport.
For
details,
see:
http://ec.europa.eu/eurostat/documents/272892/272989/HI
CP-AP+classification+2015-02/023e5b4d-6300-47dc-
b7aa-27d1e5013f3b
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standard VAT and continuously low global oil
prices. However, as the transitory impact of the
VAT rate cut for food products fades out, the
output gap closes and domestic pressures are
mounting (a further 19% increase in the minimum
wage from May 2016 and strengthening domestic
demand), inflation is set to return to positive
territory in the second half of 2016. Despite the
additional cut in the standard VAT rate by 1pp.
VAT cut announced for January 2017, inflation is
expected to re-enter the NBR's target band
(2.5% ±1 pp.) and to reach an annual average of
2.5% in 2017.
Risks to the inflation outlook are broadly balanced.
Downside risks are related to persistently low
global commodity prices, with the overall impact
amplified by the relatively large weight of
commodities in the consumption basket.
Inflationary pressures from the closing of the
output gap in 2016 may be higher than currently
expected. A gradual withdrawal of monetary
stimulus in the US and associated capital outflows
from emerging markets might exert some
downward pressure on the exchange rate which
would feed into higher inflation. Upside risks to
the projection relate mainly to a stronger-than-
expected build-up of domestic price pressures and
acceleration of wage growth.
Over the long run, there is potential for further
significant price level convergence in line with the
expected catching-up of the Romanian economy
(with income levels in purchasing power standard
at about 51% of the euro-area average in 2014).
The level of consumer prices in Romania was
around 52% of the euro-area average in 2014, with
the relative price gap widest for services.
Medium-term inflation prospects will depend
strongly on productivity and wage developments,
notably on efforts to avoid excessive wage
increases and on the success of anchoring inflation
expectations at the central bank's 2.5% target. A
prudent fiscal policy and the continuation of
structural reforms will be essential to contain
inflationary pressures and support sustainable
convergence going forward. Tax policy is expected
to have some impact on inflation in 2017 due to a
cut of the standard VAT rate by 1pp. from January
2017 and cuts in excise duties on fuel.
7.3.
PUBLIC FINANCES
7.3.1. Recent fiscal developments
Romania benefited from three consecutive
EU/IMF financial assistance programmes between
2009 and 2015. Fiscal policy targets of the 2013-
2015 precautionary programme included reaching
the medium-term budgetary objective by 2015, as
recommended by the Council (
55
), improving fiscal
governance and public debt management, and
implementing additional structural reforms to
improve public revenue and expenditure
management. On 21 June 2013, the Council
decided to abrogate the decision on the existence
of an excessive deficit according to Article 126
(12) TFEU, thereby closing the excessive deficit
procedure for Romania (
56
).
The headline general government deficit declined
further from 2.1% of GDP in 2013 to 0.9% of GDP
in 2014. In structural terms, the deficit improved
by 0.8 pp. to ¼% of GDP. The 2015 general
government deficit of 0.7% of GDP was better
than the -1.2% of GDP targeted in the 2015
Convergence Programme. The structural balance
deteriorated somewhat due to the enacted
measures.
The adjustment over 2013-2015 was mainly driven
by measures on the revenue side. The measures
adopted in 2014 included an increase in excises on
fuel, an introduction of inflation indexation of
excise duties, broadening of the property tax base,
and an increase in royalties on mineral resources
other than oil and gas. In 2015, fiscal easing
measures, namely a cut by 5 pp. in social security
contributions, a cut of the VAT rate on food and
the doubling of child benefits (from mid-2015)
were compensated by higher tax revenues on the
back of strong economic growth, better tax
compliance and lower-than-budgeted expenditure
on some public investment items (e.g. co-financing
of EU-funded projects). The general government
revenue-to-GDP ratio increased from 33.1% in
2013 to 34.8% in 2015, while total government
expenditure increased from 35.2% to 35.5% of
GDP over the same period.
(
55
) For the Country-Specific Recommendations addressed to
Romania
in
2015,
see:
http://ec.europa.eu/europe2020/pdf/csr2015/csr2015_counc
il_romania_en.pdf.
(
56
) An overview of all excessive deficit procedures can be
found at: http://ec.europa.eu/economy_finance/economic_
governance/sgp/deficit/index_en.htm
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Table 7.3:
Romania - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ calculations on the basis of the information in the programme.
There are no one-off and other temporary measures in the programme.
Sources: Commission services, the 2016 Convergence Programme of Romania.
2)
1)
(as % of GDP unless indicated otherwise)
2013
-2.1
33.1
35.2
1.7
27.5
-0.4
-1.1
0.0
-1.1
38.0
3.5
-3.1
2014
-0.9
33.5
34.3
1.7
27.7
0.8
-0.2
0.0
-0.2
39.8
3.0
-2.1
2015
-0.7
34.8
35.5
1.6
28.2
0.9
-0.4
0.3
-0.6
38.4
3.8
-1.1
2016
-2.8
31.8
34.6
1.7
26.6
-1.1
-2.8
0.1
-2.8
38.7
4.2
0.0
2016
-2.9
-2.7
39.1
4.2
2017
-3.4
31.5
34.9
1.7
25.8
-1.6
-3.4
0.0
-3.4
40.1
3.7
0.3
2017
-2.9
-2.9
39.8
4.3
2018
-2.3
-1.9
39.9
4.5
2019
-1.6
-1.3
39.3
4.7
2010
-6.9
32.7
39.6
1.5
26.9
-5.4
-5.6
0.0
-5.6
29.9
-0.8
-3.9
2011
-5.4
33.7
39.1
1.6
28.0
-3.8
-4.1
-1.1
-3.0
34.2
1.1
-3.8
2012
-3.7
33.4
37.1
1.8
28.0
-1.9
-2.0
0.5
-2.6
37.4
0.6
-4.9
General government balance
General government debt fell from 39.8% of GDP
in 2014 to 38.4% of GDP in 2015, thanks to strong
GDP growth and a relatively low general
government deficit.
7.3.2. Medium-term prospects
The budget for 2016 was adopted by the
Parliament on 16 December 2015 targeting a
deficit of 2.95% of GDP. On the revenue side, the
fiscal stance has been loosened by a new Fiscal
Code, which reduced the standard VAT rate from
24% to 20% from January 2016 and further to 19%
from January 2017. The dividend tax was also
reduced from 16% to 5%. The new Fiscal Code
also eliminates the special construction tax and the
extra excise duty on fuel from 2017. On the
expenditure side, public sector wages were
increased in several steps in 2015, including
specific increases in selected sectors and a general
wage hike by 10% as of December 2015. The
minimum wage, which also affected public sector
workers, was raised by 12.5% in 2014 and 17% in
2015. An additional 19% increase of the minimum
wage was enacted from May 2016.
Taking these measures into account, according to
the Commission services' Spring 2016 Forecast,
the 2016 general government balance will
deteriorate from -0.7% of GDP in 2015 to -2.8% of
GDP in 2016 and to -3.4% of GDP in 2017. The
structural deficit is forecast to widen by nearly
3 pp. to 3.4% of GDP in 2017 as a consequence of
the fiscal easing and closing of the output gap in
2016-2017, reflecting strongly expansionary fiscal
stance. The general government debt-to-GDP ratio
is projected to rise from 38.4% of GDP in 2015 to
40.1% of GDP in 2017.
Romania submitted the 2016 Convergence
Programme on 28 April 2016. The Programme
departs from the MTO, which has been achieved in
2014-2015, and does not aim to return to it within
the programme period. The Convergence
Programme targets a deficit of 2.9% of GDP both
in 2016 and 2017, 2.3% in 2018 and 1.6% in 2019.
The Commission services' Spring 2016 Forecast
expects the deficit to amount to 2.8% of GDP in
2016 and to further increase to 3.4% of GDP in
2017 under a no-policy-change assumption. The
Programme has a more favourable macroeconomic
scenario in 2017 compared to the macro
projections in the Commission services' Spring
2016 Forecast.
Based on the Commission's
assessment of the 2016 Convergence Programme,
there is a risk that Romania will not comply with
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the provisions of the Stability and Growth Pact, as
there is a risk of a significant deviation both in
2016 and, under unchanged policies, 2017.
Therefore further measures will be needed to
ensure compliance in 2016 and 2017. Further
details can be found in the Assessment of the 2016
Convergence Programme for Romania (
57
).
As far as the national fiscal framework is
concerned – which refers to numerical fiscal rules,
medium-term budgetary frameworks, independent
fiscal institutions, and budgetary procedures –
Romania has conducted a series of reforms since
2010, aiming to ensure fiscal discipline and
prevent the budgetary slippages. Romania has
declared its intention to apply the provisions of the
Fiscal Compact. Overall, Romania has a sound
fiscal framework in terms of principles and rules in
legislation, but the framework is not effectively
implemented in practice. Fiscal measures adopted
are often not in full compliance with the Fiscal
Responsibility Law and ad hoc government acts
providing derogations from the law are weakening
the fiscal rules. The medium-term fiscal plans are
not adequately guiding budgetary process. The
Fiscal Council is often given very little time to
react to budgetary proposals and its opinions and
recommendations are not sufficiently taken into
account.
The leu's exchange rate against the euro showed
relatively limited fluctuation between spring 2014
and beginning of 2016 also in comparison with
other regional peers operating under floating
exchange rate regimes. The leu predominantly
traded in the range of 4.4-4.5 RON/EUR since
2013. The leu fluctuated little during 2014, but
weakened somewhat in December 2014 mainly
due to an increase in risk aversion at the global
level. The leu strengthened moderately at the
beginning of 2015, supported by the additional
monetary easing in the euro area. The leu
weakened again at the end of 2015 due to domestic
political uncertainties but recovered in early 2016.
The lower short-term volatility of the leu reflected
the positive effects associated with the EU-IMF
international financial assistance to Romania until
end-2015, favourable global market conditions and
also operations by the BNR in the interbank and
foreign exchange markets. Compared to April
2014, the exchange rate of the leu against the euro
was basically unchanged in April 2016.
Graph 7.4:
Romania - RON/EUR exchange rate
(monthly averages)
5.0
4.5
4.0
7.4.
EXCHANGE RATE STABILITY
3.5
The Romanian leu does not participate in ERM II.
Romania has been operating a
de jure
managed
floating exchange rate regime since 1991 with no
preannounced path for the exchange rate (
58
).
De
facto,
the exchange rate regime moved gradually
from a strongly managed float – including through
the use of administrative measures until 1997 – to
a more flexible one. In 2005, Romania shifted to a
direct inflation targeting framework combined
with a floating exchange rate regime. The BNR
has, nonetheless, stressed that currency
intervention remains available as a policy
instrument.
3.0
2010
2011
2012
2013
2014
2015
2016
Source: ECB.
The NBR's gross international reserves declined
from on average around EUR 35bn in 2012-2013
to around EUR 33.6bn in April 2016, mainly due
to substantial repayments of international financial
assistance to IMF and EU during 2014-2016.
Short-term fluctuations in recent years have also
reflected changes in the foreign exchange reserve
requirements of credit institutions (
59
) as well as
foreign exchange operations by the government.
The reserve level was at around 22% of GDP by
end-2015, covering above 100% of short-term debt
and around 6 months of imports.
(
57
)
http://ec.europa.eu/economy_finance/economic_gov
ernance/sgp/convergence/index_en.htm
(
58
) On 1 July 2005 the Romanian Leu (ROL) was replaced by
the new leu (RON), with a conversion factor of 1 RON =
10,000 ROL. For convenience, however, the text of this
report consistently refers to leu, meaning ROL before and
RON after the conversion.
(
59
) MRR ratio on foreign currency-denominated liabilities
were cut from 20% to 18% in January, to 16% in July, and
to 14% in November 2014, and further to 12% in January
2016.
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Graph 7.5:
Romania - 3-M Robor spread to 3-M Euribor
(basis points, monthly values)
1000
Graph 7.6:
Romania - Long-term interest rate criterion
(percent, 12-month moving average)
12
10
750
8
6
500
4
250
2
0
Jan-10
2010
2011
2012
2013
2014
2015
2016
Romania
Reference value
0
Source: National Bank of Romania.
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Source: Commission services.
Short-term interest rate differentials vis-à-vis the
euro area declined gradually from around 270
basis points at the beginning of 2014 to below 200
basis points by end-2014. They continued to
decline substantially during 2015 and at the
beginning of 2016. These developments reflect
considerable monetary policy easing by the BNR
from July 2013 to May 2015, when the key rate
was by reducing the key policy rate from 5.25% to
1.75%. At the cut-off date of this report, the 3-
month spread vis-à-vis the euro area stood at
around 100 basis points.
7.5.
LONG-TERM INTEREST RATES
Long-term interest rates declined gradually from
above 5% in spring 2014 to below 4% at the end of
2014, reflecting a reduced country risk premium
backed by a solid fiscal consolidation track record
as well as a gradual downward adjustment of the
expected path of interbank rates and the
precautionary EU-IMF programme. They then
gradually declined further, temporarily moving to
below 3% in February 2015. It went up again in
mid-2015 touching 4% and fluctuated around 3.5%
thereafter. At the same time, the long-term spread
vis-à-vis the German benchmark bond declined
from above 500 basis points in late 2012 to around
250 basis points in January 2015 and stood at
around 330 basis points in April 2016 (
60
).
Graph 7.7:
Romania - Long-term interest rates
(percent, monthly values)
10
8
6
Long-term interest rates in Romania used for the
convergence examination reflect secondary market
yields on a single government benchmark bond
with a residual maturity of around nine years.
The Romanian 12-month moving average long-
term interest rate relevant for the assessment of the
Treaty criterion was below the reference value at
the time of the last convergence assessment of
Romania in 2014. Since then, it declined further to
below 5% mid-2014 and further to below 4% in
early 2015 and floated around 3.5% over most of
2015. It went slightly up again in early 2016. In
April 2016, the latest month for which data are
available, the reference value, given by the average
of long-term interest rates in Bulgaria, Slovenia
and Spain plus 2 percentage points, stood at 4.0%.
In that month, the 12-month moving average of the
yield on the Romanian benchmark bond stood at
3.6%, i.e. 0.4 percentage points below the
reference value.
4
2
0
2010
2011
2012
Romania
2013
2014
Germany
2015
2016
Source: Eurostat.
7.6.
ADDITIONAL FACTORS
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
(
60
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
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Table 7.4:
Romania - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
-4.9
-7.0
1.2
-1.3
2.1
0.5
-4.4
-3.5
-1.3
-1.3
-1.7
1.8
0.7
-4.3
0.9
27.9
23.5
74.9
-65.4
2012
-4.8
-6.9
1.9
-1.7
2.0
1.4
-3.4
-2.5
-1.9
-2.6
3.1
-1.1
-1.1
-1.4
0.9
26.8
22.6
75.3
-67.4
2013
-1.1
-4.0
3.3
-2.2
1.9
2.1
1.0
1.1
-2.0
-3.8
5.5
-3.3
1.4
-0.3
0.1
25.6
24.9
68.2
-62.6
2014
-0.5
-4.2
3.9
-1.3
1.1
2.6
2.2
1.9
-1.8
-1.9
6.6
-3.0
-0.9
2.9
-0.2
25.2
25.4
63.1
-57.4
2015
-1.1
-4.9
4.3
-2.4
1.8
2.4
1.3
1.8
-1.7
0.5
3.4
-0.9
-0.4
2.2
0.5
25.6
24.7
56.2
-51.1
-5.1
-7.6
1.2
-1.2
2.5
0.2
-4.9
-4.5
-1.8
-0.7
-4.6
6.3
2.6
-7.1
0.4
26.8
22.3
74.3
-63.4
of which: Direct investment
Portfolio investment
Other investment
3)
Of which International financial assistance
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Commission services, National Bank of Romania.
additional factors – including balance of payments
developments, product, labour and financial
market integration – gives an important indication
of a Member State's ability to integrate into the
euro area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
61
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Romania exceeded the
indicative threshold in one out of fourteen
indicators, i.e. the net international investment
position. Romania benefited from a precautionary
EU-IMF financial assistance programme totalling
up to about EUR 5 billion which ended end
September 2015. Close surveillance related to this
arrangement implied that Romania was not subject
to in-depth reviews in the context of the MIP in
order to avoid the duplication of surveillance
procedures until 2014 (
62
). In line with the
conclusions of the AMR 2016 (i.e. that imbalances
had been identified for Romania in the previous
(
61
)
http://ec.europa.eu/europe2020/pdf/2016/ags2016_al
ert_mechanism_report.pdf
(
62
) http://eur-lex.europa.eu/LexUriServ/
LexUriServ.do?uri=OJ:L:2013:140:0001:0010:EN:PDF
MIP round), Romania was subject to an in-depth
review, which found that Romania is not
experiencing macroeconomic imbalances.
7.6.1. Developments
payments
of
the
balance
of
Romania's external balance (i.e. the combined
current and capital account) has adjusted
significantly in the wake of the global crisis. After
having recorded a deficit of around 5% of GDP in
2010 it narrowed and then shifted into a surplus
starting in 2013 which more than doubled in 2014.
Although positive at around 1.3% of GDP, the
external surplus modestly deteriorated in 2015.
The overall improvement in the external balance in
the last three years reflected a significant decline in
the trade deficit, on the back of strong export
performance resulting in a decrease in the balance
of goods deficit and a rising surplus in the services
balance. With the exception of 2013, the primary
income balance deficit has widened while the
secondary income balance surplus has decreased.
Finally, the capital account recorded an increasing
surplus in 2013-2015 due to, inter alia, improved
absorption of EU funds.
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The current account adjustment was supported by
corrections of the savings-investment balance.
Romania's saving-investment balance narrowed
from -4.5% in 2010 to close to balance in 2014 and
widened slightly to around -0.9% in 2015 as both
private and public sectors continued to adjust in
parallel with improving financial conditions. The
decline in investment up to 2014, contributed to
the adjustment of the current account balance. In
2015, investment increased slightly, while saving
decreased, resulting in a deterioration of the
current account balance.
Improvements in cost competitiveness sustained
export performance fuelled by a moderate
depreciation in 2014-2015 of the nominal (NEER)
and the real effective exchange rate (REER).
Romania's improved competitiveness contributed
to one of the highest growth rates in export market
shares in the EU in 2010-2014. Romania was able
to gain market shares in the EU market and also
benefited from the dynamism of markets outside
the EU.
Graph 7.8:
Romania - Saving and investment
30
(in percent of GDP at market prices)
balance and a recovery in global risk appetite.
After net FDI inflows had fallen sharply in
2009-2010, they stabilised broadly in 2013-2015,
averaging around 2.0% of GDP. Net portfolio
inflows increased gradually to reach nearly 4% of
GDP in 2013, mainly reflecting significant
portfolio investment into government securities
following the inclusion of Romania in a number of
international benchmark indices. However,
portfolio inflows declined in 2014 and turned into
outflows in 2015 in part due to the amortisation of
government bonds. Gross external debt peaked at
above 75% of GDP in 2012 reflecting the increase
of public external debt. It declined to 56.2% of
GDP in 2015, due to falling public and private
sector debt. The net international investment
position bottomed out at around -67% of GDP in
2012 and has improved since then to around -51%
of GDP in 2015, on the back of narrowing current
account deficits and strong nominal growth.
According to the Commission services' Spring
2016 Forecast, the external balance is expected to
remain in balance in 2016 and to widen to -0.7%
of GDP in 2017 as domestic demand accelerates,
but to remain contained. Romania's external
position benefited from higher absorption of EU
funds up to 2015. It is expected to deteriorate in
2016 due to lower EU funds' absorption related to
the end of the 2007-2013 programming period
while the implementation of the 2014-2020
programmes has just started.
Graph 7.9:
Romania - Effective exchange rates
120
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
20
10
0
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
Romania was a beneficiary of international
financial assistance between 2009 and 2011, when
it benefitted from EU balance-of-payments
assistance programme and an IMF stand-by
arrangement. The success of this EU-IMF
programme and two successor programmes (2011-
2013 and 2013-2015) enabled Romania to regain
full market access since mid-2011. The latter two
programmes were on a precautionary basis and no
drawings were made. Romania has repaid all
liabilities to the IMF and part of liabilities to the
EU (EUR 1.6bn in 2015). Given the disbursements
made under the first programme, Romania will be
under post-programme surveillance until spring
2018, when 70 % of the financial assistance from
the European Union has been repaid.
External financing pressures eased further in 2013-
2015 amid the improvement in the external
110
100
90
80
2010
2011
NEER
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
7.6.2. Market integration
Romania's economy is well integrated with the
euro area through both trade and investment. The
trade openness of Romania has increased
significantly in the aftermath of the crisis, but is
still relatively low. Trade openness in 2015 stood
at around 45% of GDP. Romania's main trading
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Convergence Report 2016 - Technical annex
Chapter 7 - Romania
Table 7.5:
Romania - Market integration
2010
Trade openness
1)
2011
43.5
22.6
6.2
72
77
1.2
84.2
2.7
2012
43.8
22.7
0.3
72
78
0.4
76.5
3.1
2013
44.0
24.0
17.9
73
76
1.0
74.3
2.4
2014
45.1
24.7
5.2
37
59
1.0
72.0
n.a.
2015
45.1
25.1
1.9
37
53
1.2
73.2
n.a.
(%)
4)
38.8
20.4
4.6
65
67
0.5
100.0
2.9
6)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
partners within the euro area are Germany, Italy
and France, while outside the euro area it mainly
trades with Hungary, Poland, Turkey and the
United Kingdom. The share of trade with the euro
area expressed in percentage of GDP has been
increasing in recent years, reaching 25% in 2015.
Due to wage competitiveness, favourable corporate
tax rates and a relatively large domestic market,
Romania attracted substantial FDI inflows. The
FDI stock reached 56% of GDP in 2014, with main
FDI inflows originating from euro-area Member
States, with the Netherlands, Austria and Germany
accounting for more than half of the FDI stock at
the end of 2014.
Concerning the business environment, Romania
performs, in general, worse than most euro-area
Member States in international rankings. In
particular, Romania has low ranks in trading across
borders and in registering property. According to
the May 2015 Internal Market Scoreboard,
Romania's transposition deficit of EU Directives
was at 1.2% which is substantially above the target
(0.5%) proposed by the European Commission in
the Single Market Act (2011).
In terms of resilience during the crisis, the capacity
of the Romanian labour market to adjust has been
improved. The social dialogue law enacted in 2011
promoted a decentralisation of collective
bargaining. However, a combination of factors,
including representativeness criteria for trade
unions and employers' associations, has hampered
collective bargaining at sector and undertaking
level. A recent revision of the social dialogue law
aims at improving collective bargaining by
establishing a representation cascade for trade
unions at higher level when no representative trade
union exists in the undertaking. Strong outward
migration, including of the highly-skilled workers,
presents a challenge to support a competitive
economy.
Graph 7.10:
Romania - Foreign ownership and concentration
in the banking sector
80
(in percent, weighted averages)
70
60
50
40
30
20
10
0
RO, 2010
RO, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
Source: ECB, Structural financial indicators
The Romanian financial sector is highly integrated
into the EU financial sector, in particular through
the strong presence of foreign banks in Romania.
The share of foreign-owned banks, mainly euro
area parent banks, in the total assets of the
Romanian banking sector reached 68% in 2014.
Concentration in the banking sector, as measured
by the market share of the largest five credit
institutions at 54%, remained above the euro area
average.
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The Romanian banking sector has remained
resilient and well-capitalised as capital adequacy at
system level stood at roughly 17.1% in Q3 2015,
substantially above the euro area average. The
deterioration in asset quality and the increase in
loan-loss provisions necessary to support the
cleaning up of bank balance sheets have put a
strain on banking sector profitability until 2014,
with return on equity declining from 22.5% in
2007 to -15.2% in 2014. The banking system
returned to profit in 2015 (12% in Q3 2015). Non-
performing loans (90 days overdue) have increased
significantly in the post-crisis period (i.e. from
below 2% in 2007) and peaked at nearly 20% in
2013. In 2014, measures were implemented to
resolve non-performing loans which led to their
decline to 12.4% in Q3 2015, although remaining
considerably above the average of the euro area.
Graph 7.11:
Romania - Selected banking sector soundness
indicators
18
%
16
14
12
10
8
6
4
2
0
of foreign-currency loans to the private sector
decreased from a peak of around 67% of the total
loans in 2012, inter alia due to the measures
introduced by the National Bank of Romania to
curb foreign-currency lending to unhedged
households and corporates, in particular SMEs,
and restricting the state guaranteed mortgage
scheme to lending in domestic currency. However,
recent legislative initiatives, including the recently
enacted Law on debt discharge, raise concerns in
terms of their potential impact on financial
stability and the economy.
Equity and debt markets in Romania have
remained comparatively underdeveloped. Stock
market capitalisation (9.5% of GDP in 2015) has
remained very low compared to the euro area
average of 60%. The debt securities market
remained small in comparison with the euro area
average (28% vs. 158% of GDP) and has been
dominated by issuances of government debt (T-
bills and bonds denominated in both RON and
foreign currency), whereas the issuance of
corporate and municipal bonds has remained
limited. Consolidated private sector debt declined
from 74% of GDP in 2010 to below 60% in 2015
and was significantly below the euro-area average.
RO, 2010
Return on equity
RO, Q3-15
Capital adequacy
EA, 2010
EA, Q3-15
Non performing loans
Source: ECB, EC calculations, NBR.
After the pre-crisis boom, house prices have
followed a negative trend from 2008 (the first year
with available data) to 2014. In 2015, real house
prices went up slightly and reached 73% of their
2010 level. Investment in dwellings has been
fluctuating at around 2.5-3% of GDP in the past
five years.
Graph 7.12:
Romania - Recent development of the
financial system relative to the euro area
180
160
140
120
100
80
60
40
20
0
(in percentage of GDP)
RO, 2010
Debt securities
RO, 2015
EA, 2010
EA, 2015
Stock market capitalisation
Credit to households
Credit to non-financial corporations
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
Romania still lags considerably behind the euro
area as regards bank credit to the private non-
financial sector (around 31% of GDP), around half
of it in foreign currency (47% of total). The share
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8.
8.1.
SWEDEN
LEGAL COMPATIBILITY
8.1.1. Introduction
The legal rules governing the Swedish Central
Bank (Riksbank) are laid down in the Instrument
of Government (as part of the Swedish
Constitution) and the Riksbank Act from 1988, as
amended. No amendments to these legal acts were
passed with regard to the incompatibilities and the
imperfections mentioned in the 2014 Convergence
Report.
8.1.2. Central Bank independence
interpretation through reference to the explanatory
memorandum to the Law (the memorandum
extends the coverage to all ESCB tasks), one could
consider these tasks as tacitly encompassed by the
principle of central bank independence. However,
the principle of the Riksbank's institutional
independence cannot be considered as fully
respected from a legal certainty perspective as long
as the legal text itself does not contain a clear
reference to them. Both provisions are therefore
considered as incompatible with Article 130 of the
TFEU and Article 7 of the ESCB/ECB Statute.
Pursuant to Article 4 of Chapter 10 of the
Riksbank Act, the Swedish Parliament approves
the Central Bank's profit and loss account and its
balance sheet and determines the allocation of the
Central Bank's profit. This practice impinges on
the financial independence of the Riksbank and is
incompatible with Article 130 of the TFEU. The
Parliament must not be involved in the relevant
decision-making process. Its right should be
limited to approving the Central Bank's decision
on the profit allocation. Legislative proposals to
tackle the flaw have been submitted by the
Swedish legislator but still provide for a decisive
role of the Parliament in profit distribution and
budget allocation, which are incompatible with the
principle of financial independence as enshrined in
Article 130 of the TFEU.
Article 4 of Chapter 1 of the Riksbank Act
provides for the replacement of the Governor, in
case of absence or incapacity, by the Vice-
Governors nominated by the General Council. It is
unclear whether the notion "absence" in Article 4
also refers to cases such as the expiry of the term
of office, resignation, dismissal or other cause of
termination of office. To ensure the smooth and
continuous functioning of the Riksbank, the
Riksbank Act would benefit from some
improvement and should provide for clear
procedures and rules regarding the succession of
the Governor in case the notion "absence" also
refers to instances of termination of office as well
as in case the Governor is incapacitated.
8.1.3. Prohibition of monetary financing and
privileged access
Article 3 of Chapter 6 of the Riksbank Act obliges
the Riksbank to inform the minister appointed by
the Swedish Government about a monetary policy
decision of major importance prior to its approval
by the Riksbank. A dialogue between a central
bank and third parties is not prohibited as such, but
regular upfront information of government
representatives about monetary policy decisions,
especially when the Riksbank would consider them
as of major importance, could structurally offer to
the government an incentive and the possibility to
influence the Riksbank when taking key decisions.
Therefore, the obligation to inform the minister
about a monetary policy decision of major
importance prior to its approval by the Riksbank
limits the possibility for the Riksbank to
independently take decisions and offers the
possibility for the Government to seek to influence
them. Such procedure is incompatible with the
prohibition on giving instructions to the Central
Bank, pursuant to Article 130 of the TFEU and
Article 7 of the ESCB/ECB Statute. Article 3 of
Chapter 6 should be revised in order to ensure that
monetary policy decisions of major importance are
communicated to the minister, if ever, only after its
approval by the Riksbank and for information
purposes only.
Pursuant to Article 2 of Chapter 3 of the Riksbank
Act and Article 13 of Chapter 9 of the Instrument
of Government, the prohibition on the members of
the Executive Board to seek or take instructions
only covers monetary policy issues. The provisions
do not provide for their independence in the
performance of ESCB-related tasks directly
entrusted by the Treaties. By means of broad
Under Article 8 of Chapter 6 of the Riksbank Act,
the Riksbank may, in exceptional circumstances,
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Convergence Report 2016 - Technical annex
Chapter 8 - Sweden
grant credits or provide guarantees on special
terms to banking institutions and Swedish
companies that are under the supervision of the
Financial Services Authority. In order to comply
with the prohibition on monetary financing of
Article 123 of the TFEU it should be clearly
specified that the loan is granted against adequate
collateral to ensure that the Riksbank would not
suffer any loss in case of the debtor's default.
Although the Swedish Parliament inserted a new
article 8a in Chapter 6 of the Riksbank Act
obliging the Riksbank to provide information to
the Government and a number of relevant public
authorities on implemented liquidity support, the
occasion was not seized to amend Article 8 as
suggested above. Therefore, it continues to
constitute an incompatibility with the prohibition
on monetary financing under Article 123 of the
TFEU.
Pursuant to Article 1(3) of Chapter 8 of the
Riksbank Act, the Riksbank shall not extend
credits or purchase debt instruments "directly from
the State, another public body or institution of the
European Union". The Article does not enumerate
the entities covered by the prohibition of monetary
financing correctly. Therefore, Article 1 is
incompatible with the wording of Article 123(1) of
the TFEU and 21(1) of the ESCB/ECB Statute.
According to the Article 1(4) of Chapter 8 of the
Riksbank Act, the Riksbank may grant credit to
and purchase debt instruments from financial
institutions owned by the State or another public
body. This provision of Article 1 does not fully
comply with Article 123(2) of the TFEU and
Article 21.3 of the ESCB/ECB Statute because the
exemption only covers publicly owned institutions.
For the sake of legal certainty it should be added
that, in the context of the supply of reserves by
central banks, these publicly owned credit
institutions should be given the same treatment as
private credit institutions.
The provisions of Article 4 of Chapter 10 on the
allocation of the Riksbank’s profit are
supplemented by non-statutory guidelines on profit
distribution, according to which the Riksbank
should pay 80% of its profit to the Swedish State,
after adjustment for exchange rate and gold
valuation effects and based on a five-year average,
with the remaining 20% used to increase its
contingency and balancing funds. Although these
guidelines are not legally binding but accepted as a
practice by Parliament for calculating profit
allocation and there is no statutory provision
limiting the amount of profit that may be paid out,
such practice could constitute an incompatibility
with the principle on the prohibition of monetary
financing under Article 123 of the TFEU. For legal
certainty reasons the law should ensure that the
reserve capital of Riksbank is left unaffected in
any case and that the actual contribution to the
State budget does not exceed the amount of the net
distributable profit.
8.1.4. Integration in the ESCB
Objectives
Chapter 1, Article 2 of the Riksbank Act should
include a reference to the secondary objective of
the ESCB, while the promotion of a safe and
efficient payment system as a task should be
subordinated to the primary and secondary
objectives of the ESCB.
Tasks
The incompatibilities of the Riksbank Act with
regard to the ESCB/ECB tasks are as follows:
absence of a general reference to the Riksbank
as an integral part of the ESCB and to its
subordination to the ECB’s legal acts (Chapter
1, Article 1);
definition of monetary policy and monetary
functions, operations and instruments of the
ESCB (Chapter 1, Article 2 and Chapter 6,
Articles 2, 3 and 5 and 6, Chapter 11, Article 1
and 2a of the Act; Chapter 9, Article 13 of the
Instruments of Government);
conduct of foreign exchange operations and the
definition of foreign exchange policy (Chapter
7 of the Act; Chapter 8, Article13 and Chapter
9, Article 12 of the Instruments of
Government); Articles 1 to 4 of the Law on
Exchange Rate Policy;
right to authorise the issue of banknotes and the
volume of coins and definition of the monetary
unit (Chapter 5 of the Act; Chapter 9, Article
14 of the Instruments of Government);
ECB's right to impose sanctions (Chapter 11,
Articles 2a, 3 and 5).
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Chapter 8 - Sweden
There are furthermore
regarding the:
some
imperfections
non-recognition of the role of the ECB and of
the EU in the collection of statistics (Chapter 6,
Articles 4(2) and Article 9, 10 and 11);
non-recognition of the role of the ECB in the
functioning of payment systems (Chapter 1,
Article 2; Chapter 6, Article 7);
non-recognition of the role of the ECB and of
the Council in the appointment of an external
auditor;
non-recognition of the role of the ECB in the
field of international cooperation (Chapter 7,
Article 6).
8.1.5. Assessment of compatibility
Bulgaria, Slovenia and Spain, plus 1.5 percentage
points. The corresponding inflation rate in Sweden
was 0.9%, i.e. above the reference value. Sweden's
12-month average inflation rate is likely to return
below the reference value in the months ahead.
8.2.2. Recent inflation developments
HICP inflation in Sweden bottomed out in late-
2014. The depreciation of the krona, tax hikes as
well as expanding domestic demand supported by
an accommodative monetary policy resulted in an
average inflation rate of 0.7% in 2015, compared
with 0.2% the year before. On average, Swedish
HICP inflation reached about 1% in the first
quarter of 2016.
Graph 8.2:
Sweden - HICP inflation
(y-o-y percentage change)
4
As regards the prohibition on monetary financing,
the independence of the Riksbank as well as its
integration into the ESCB at the time of euro
adoption, the legislation in Sweden, in particular
the Riksbank Act and the Instrument of
Government as part of the Swedish Constitution, is
not fully compatible with the compliance duty
under Article 131 of the TFEU.
2
0
-2
2010
2011
2012
Sweden
2013
2014
2015
Euro area
Source: Eurostat.
8.2.
PRICE STABILITY
8.2.1. Respect of the reference value
Graph 8.1:
Sweden - Inflation criterion since 2010
(percent, 12-month moving average)
5
4
3
2
1
0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Sweden
Reference value
Note: The dots in December 2016 show the projected
reference value and 12-month average inflation in the country.
Sources: Eurostat, Commission services' Spring 2016 Forecast.
Core inflation (measured as HICP inflation
excluding energy and unprocessed food) followed
a similar pattern as headline inflation, increasing
from 0.5% in 2014 to 1.1% in 2015. The pick-up
was induced by all of its three main components.
Inflation in the service sector increased from 0.9%
in 2014 to 1.3% in 2015 while processed food
prices increased by 2.1% in 2015, after 1.0% in
2014, reflecting international price developments
over that period. Non-energy industrial goods
prices also started rising again in 2015, after
having declined for four years. Producer price
inflation was almost flat in 2014 before turning
negative (averaging -1.9%) in 2015. Positive rates
for the first half of the year were outweighed by
negative ones during the second half due to falling
energy and commodity prices.
The 12-month average inflation rate, which is used
for the convergence evaluation, was below the
reference value at the time of the last convergence
assessment of Sweden in 2014. In April 2016, the
reference value was 0.7%, calculated as the
average of the 12-month average inflation rates in
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Chapter 8 - Sweden
Table 8.1:
Sweden - Components of inflation
2010
HICP
Non-energy industrial goods
Energy
Unprocessed food
Processed food
Services
HICP excl. energy and unproc. food
HICP at constant taxes
Administered prices HICP
1.9
0.9
5.5
0.9
1.8
1.8
1.5
1.9
1.7
2011
1.4
-0.5
4.8
-1.8
2.7
1.7
1.1
1.4
1.9
2012
0.9
-1.0
0.5
1.6
2.4
1.8
1.0
1.3
3.1
2013
0.4
-0.8
-1.4
3.5
1.3
1.1
0.5
0.4
1.9
2014
0.2
-0.4
-2.0
0.0
1.0
0.9
0.5
0.2
1.7
(percentage change)
1)
2015
0.7
0.3
-4.7
4.1
2.1
1.3
1.1
0.5
1.2
Apr-16
0.9
0.9
-4.2
4.6
1.6
1.3
1.2
0.7
1.1
weights
in total
2016
1000
286
87
63
141
424
851
1000
141
1) Measured by the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices
in the previous period.
Sources: Eurostat, Commission services.
8.2.3. Underlying factors and sustainability of
inflation
Macroeconomic
stance
policy
mix
and
cyclical
Sweden's economic growth has accelerated and is
expected to remain robust in the coming years.
Real GDP expanded by 2.3% in 2014 and 4.1% in
2015, making Sweden one of the currently fastest-
growing economies in the EU. Steady growth in
domestic demand, supported by expansionary
monetary policy, helped to sustain economic
growth against the impact of a weak external
environment. In 2015, strong investment growth,
rebounding exports and increasing government
consumption also provided a significant impetus to
growth. Annual real GDP growth rates are
projected to slow down slightly to 3.4% in 2016
and 2.9% in 2017. The output gap has been
negative over the past years, but is expected to turn
positive in 2016 and to remain so in 2017.
The fiscal stance, as measured by changes in
structural balance, was expansionary in 2014 and
rather restrictive in 2015. It is expected to be
slightly expansionary in 2016 and 2017.
Monetary policy, conducted within an inflation
targeting
framework (
63
),
was
loosened
significantly since December 2011. In response to
low inflationary pressures and sluggish economic
growth, the Riksbank gradually cut its main policy
rate from 2% in autumn 2011 to minus 0.5% in
February 2016. Nevertheless, inflation has been
below the target of 2% since 2011, due to the weak
international economic activity and dampened
(
63
) Since 1995, the Riksbank has targeted increases in the
domestic CPI with the aim of keeping inflation at 2%.
export price growth abroad. In February 2015, the
Riksbank also announced an asset purchase
programme which – having been extended in
several steps – aims at purchasing a total of SEK
245 billion in government bonds by the end of
2016 (SEK 200 billion until end-June and a further
SEK 45billion during the second half of this year).
Wages and labour costs
Employment recovered quickly following the
financial crisis and has been expanding at a strong
pace, growing by 1.4% in 2014 and 1.5% in 2015.
This rise was driven primarily by services and the
public sector, while the manufacturing and energy
sectors saw a decrease in the number of employed
persons. Continued building activity should also
strengthen the contribution of the construction
sector in creating jobs over the coming years.
In spite of steadily growing employment, the
unemployment rate still hovers around roughly 7%
due to increases in the labour force. Migrants enter
the labour force only gradually. Also, employment
is likely to be affected with a lag, as it could take
several years for newly arrived migrants to find
jobs.
The annual growth of nominal compensation per
employee fell from above 3% in 2012 to 1.9% in
2013, but has subsequently increased again. In
2015, it stood at 3.6% according to the
Commission services' Spring 2016 Forecast but is
likely to fall back somewhat in 2016 (3.1%) and
2017 (3.2%).
Growth in labour productivity was moderate in
2013 and 2104, with 0.3% and 0.9%, respectively,
but experienced a rebound last year at 2.6%. It is
likely to become more subdued again in the next
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Chapter 8 - Sweden
Table 8.2:
Sweden - Other inflation and cost indicators
2010
HICP inflation
Sweden
Euro area
Private consumption deflator
Sweden
Euro area
Sweden
Euro area
Labour productivity
Sweden
Euro area
Nominal unit labour costs
Sweden
Euro area
Imports of goods deflator
Sweden
Euro area
0.3
6.0
-0.3
7.0
-1.9
2.6
-3.7
-2.0
1.1
-2.6
-2.6
-0.6
2.6
0.6
4.1
1.9
1.7
1.1
1.3
1.0
5.0
2.8
0.5
1.5
-1.0
-0.1
0.3
0.6
0.9
0.3
1.5
1.6
2.2
2.2
1.7
2.3
3.2
2.2
0.5
1.9
3.1
1.8
0.7
1.1
1.9
1.7
0.7
0.5
2.2
1.3
1.9
1.6
1.4
2.7
0.9
2.5
0.4
1.3
0.2
0.4
2011
2012
2013
2014
(annual percentage change)
2015
0.7
0.0
1.0
0.2
3.6
1.2
2.6
0.6
1.0
0.7
-0.7
-3.6
2016
1)
0.9
0.2
1.1
0.4
3.1
1.5
1.8
0.5
1.3
0.9
-2.9
-2.7
2017
1)
1.2
1.4
1.3
1.3
3.2
1.9
1.4
0.8
1.8
1.1
1.2
1.1
Nominal compensation per employee
1) Commission services' Spring 2016 Forecast.
Source: Eurostat, Commission services.
couple of years, while remaining above 1% both in
2016 and 2017. Accordingly, growth in nominal
unit labour costs (ULC), which stood at 1.3% in
2014 and fell to 1.0% in 2015, is projected to
increase to 1.3% and 1.8% in 2016 and 2017
respectively. These developments point to
relatively limited price pressures from labour costs
in the years ahead.
Graph 8.3:
Sweden - Inflation, productivity and wage trends
8
(y-o-y % change)
External factors
4
0
Given the high openness of the Swedish economy,
developments in import prices play an important
role in domestic price formation. Import price
growth (measured by the imports of goods
deflator) has fluctuated significantly over the past
years. Developments can be largely explained by,
on the one hand, falling international commodity
price inflation, and on the other hand the
weakening krona. Looking ahead, the import
deflator is expected to be negative this year, but is
likely to return to a positive growth path as from
2017, thus dampening external disinflationary
pressures.
The real effective exchange rate (measured against
a group of 36 trading partners) has depreciated in
2014 and 2015 due to the weak krona, while
domestic prices continue to grow more slowly than
in the main trading partners. Overall, Swedish cost
developments do not pose major challenges in
terms of competitiveness.
-4
2010
2011
2012
2013
2014
2015
2016
2017
Productivity (real GDP per person employed)
Nominal compensation per employee
Nominal unit labour costs
HICP inflation
Source: Eurostat, Commission services' Spring 2016 Forecast.
In fact, the current low inflation expectations can
be said to have influenced wage negotiations this
year. While some sectors have challenged the
agreed benchmark, wage increases are likely to be
relatively modest, overall in line with the 2.2%
one-year agreement with industry.
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Administered prices and taxes
The share of administered prices (
64
) in the
Swedish HICP basket amounts to 14% and it is
thus close to the euro-area average of 13%.
Although not very large, it still contributed to
driving inflation upwards over the last two years,
as it stood at 1.7% in 2014 and 1.2% in 2015,
largely explained by increases in rental prices,
which rose by 1.3% over the period 2014/15 –the
smallest increase since 2007.
Tax changes also added somewhat to higher
headline inflation as emphasised by the slower
pace with which HICP at constant taxes increased
over the past two years.
Medium-term prospects
In the medium term, inflation is likely to pick up
given the projected closure of the output gap and
further decreases in unemployment. With the
expected robust domestic demand, companies are
projected to raise prices and cautiously compensate
for the subdued price levels over the past years. On
the other hand, moderate wage developments,
spare capacity still lingering in the Swedish
economy and strong international competition will
weigh on consumer price developments in the
short run.
8.3.
PUBLIC FINANCES
8.3.1. Recent fiscal developments
HICP inflation is likely to increase moderately in
the course of 2016 on the back of currently strong
growth and tax hikes. At the same time low oil
prices have the opposite effect. No particular
upward pressure is foreseen from any HICP
component and wage developments are projected
to remain moderate. Accordingly, the Commission
services' Spring 2016 Forecast projects annual
average inflation at 0.9% in 2016 and 1.2% in
2017.
Risks to the inflation outlook appear to be broadly
balanced. An appreciating krona could dampen the
currently projected rising inflation trajectory, even
though the Riksbank has announced its intention to
directly intervene on the foreign exchange market
if necessary. At the same time, the Riksbank's
loose monetary conditions could prevail, leading to
faster inflation acceleration.
The level of consumer prices in Sweden relative to
the euro area gradually increased since Sweden
joined the EU in 1995. In 2014, the Swedish price
level was at some 124% of the euro-area average,
down from 129% in 2013. At the same time, the
income level in Sweden remained rather stable
over the past ten years, reaching 115% of the euro-
area average in PPS in 2014.
Sweden’s general government deficit improved
significantly last year from 1.6% of GDP in 2014
to 0.0% of GDP in 2015. This was mainly due to a
strong rise in tax revenues, supported by strong
private consumption and tax increases (principally
increased social fees for young people, higher
income taxes for high-income-earners, energy and
fuel taxes and some excise duties) and a temporary
high corporate tax payment in the fourth quarter of
2015.
The structural balance improved, from a deficit of
0.3% of GDP in 2014 to a surplus of 0.3% in 2015.
The higher expenditure related to the large refugee
and migrant inflows into Sweden over the last
couple of years has been so far compensated with
strong economic growth and tax hikes. The
expenditure-to-GDP ratio decreased from 51.7% of
GDP in 2014 to 50.4% in 2015, while the
revenues-to-GDP ratio increased by 0.2 pp. to
50.4% of GDP.
Overall, Swedish public finances remain robust.
The budgetary outcome in 2015 was substantially
better than the deficit of 1.4% of GDP targeted in
the 2015 Convergence Programme, generally on
the back of stronger-than-expected growth in 2015.
The government debt-to-GDP ratio rose to 44.8%
in 2014, i.e. up by 5 pp. compared to 2013. This
was due largely to statistical factors linked to
changing accounting standards. In 2015, the
government gross debt came down to 43.4% of
GDP.
(
64
) According to the Eurostat definition, fully administered
prices in Sweden
inter alia
include water supply, refuse
and sewerage collection, hospital services and combined
passenger transport. Mainly administered prices
inter alia
include actual rents for housing and medical services. For
details, see
http://ec.europa.eu/eurostat/web/hicp/methodology/hicp-
administered-prices
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Table 8.3:
Sweden - Budgetary developments and projections
Outturn and forecast
- Total revenues
- Total expenditure
of which:
- Interest expenditure
p.m.: Tax burden
Primary balance
Cyclically-adjusted balance
One-off and temporary measures
Structural balance
Government gross debt
p.m: Real GDP growth (%)
p.m: Output gap
Convergence programme
General government balance
Structural balance
2) 3)
Government gross debt
p.m. Real GDP (% change)
1) Commission services’ Spring 2016 Forecast.
2) Cyclically-adjusted balance excluding one-off and other temporary measures.
3) Commission services’ calculations on the basis of the information in the programme.
There are no one-off and other temporary measures in the programme.
Sources: Commission services, the 2016 Convergence Programme of Sweden.
2)
1)
(as % of GDP unless indicated otherwise)
2013
-1.4
51.0
52.4
0.8
43.8
-0.6
0.0
0.0
0.0
39.8
1.2
-2.4
2014
-1.6
50.2
51.7
0.7
43.8
-0.9
-0.3
0.0
-0.3
44.8
2.3
-2.1
2015
0.0
50.4
50.4
0.5
44.1
0.5
0.3
0.0
0.3
43.4
4.1
-0.5
2016
-0.4
49.8
50.1
0.5
43.8
0.1
-0.5
0.0
-0.5
41.3
3.4
0.2
2016
-0.4
-0.8
42.5
3.8
2017
-0.7
49.7
50.4
0.5
43.9
-0.2
-0.9
0.0
-0.9
40.1
2.9
0.4
2017
-0.7
-0.8
41.1
2.2
2018
-0.4
-0.4
40.3
1.8
2019
0.1
-0.1
39.1
2.1
2010
0.0
51.1
51.2
1.1
44.1
1.0
0.8
0.0
0.8
37.6
6.0
-1.4
2011
-0.1
50.5
50.5
1.1
43.5
1.0
0.1
0.0
0.1
36.9
2.7
-0.2
2012
-0.9
50.7
51.7
0.9
43.5
0.0
0.2
0.0
0.2
37.2
-0.3
-1.9
General government balance
8.3.2. Medium-term prospects
Partly as a consequence of the migration and
integration challenges, the 2016 Budget Bill,
which was adopted on 17 December 2015,
includes measures to promote labour market
integration of vulnerable groups and education
investments amounting to SEK 24 billion (EUR
2.55 billion).
By raising income tax rates for high-income
earners and increased social fees for young
employees and those older than 65, the budget also
contributes to a limited tax shift back to labour. It
also reduces deductions applicable to certain types
of services, for instance for house repair and
maintenance and for domestic services. Further tax
increases in 2016 relate predominately to labour
taxes (by 8.6% due to the combined effect of a
sharp increase in the tax bases and rate hikes (
65
))
and to local government taxes. In addition to the
inherent uncertainty linked to expenditure on
(
65
) Mainly explained by legislated measures involving the
gradual reduction of earned income tax credit, an
unchanged lower threshold for central government income
tax, abolished reduction of social security contributions for
young people, lowered level of subsidy for home
renovation services (ROT) and higher tax on petrol and
diesel.
migration and integration, there is also a risk for
the budget related to sickness leave benefits, where
the expenditure has been on the rise over the past
years. Since 1 February 2016, the 2.5-year-cap on
the sickness insurance has been lifted, which will
most likely have an increasing effect on
expenditure.
The budget balance is foreseen to deteriorate in
2016 and 2017, as tax increases are likely to be
outweighed by costs related to the recent large
inflow of refugees and migrants and increasing
sickness insurance expenses. The Spring Budget
Bill includes measures involving expenditure
amounting to SEK 31 billion to address the
challenges linked to migration and integration.
According to the Commission services' Spring
2016 Forecast, the general government deficit will
reach 0.4% of GDP in 2016 and 0.7% in 2017 and
the structural deficit is also set to deteriorate to
0.9% until 2017. The revenue-to-GDP ratio is
expected to remain rather stable at around 50% of
GDP, while the expenditures are likely to remain
at around 51% of GDP.
Gross government debt is well below the 60% of
GDP Treaty reference value and is expected to
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Chapter 8 - Sweden
gradually decline in the coming years, reaching
41.3% of GDP in 2016 and 40.1% of GDP in
2017, mainly supported by strong economic
growth and falling debt servicing costs due to low
interest rates.
Sweden submitted the 2016 Convergence
Programme on 28 April 2016. The main aim of the
presented fiscal strategy is to remain at the
medium-term budgetary objective (MTO), i.e. a
structural balance of -1% of potential GDP. The
Convergence Programme foresees a deficit of
0.4% of GDP in 2016 and 0.7% of GDP in 2017,
which is fully in line with the Commission
services' Spring 2016 Forecast. Based on the
Commission's assessment of the Convergence
Programme and taking into account the
Commission services' Spring 2016 forecast,
Sweden is expected to comply with the provisions
of the Stability and Growth Pact. Further details
can be found in the Assessment of the 2016
Convergence Programme for Sweden. (
66
)
As far as the fiscal framework is concerned –
which refers to numerical fiscal rules, medium-
term budgetary frameworks, independent fiscal
institutions, and budgetary procedures –Sweden
has a strong domestic system since the 1990s,
which is also reflected in its extensive track record
of fiscal soundness. The main pillars of the
framework are (i) the numerical target defined
over the cycle for general government; (ii) a
balanced-budget rule for local authorities; (iii) an
effective medium-term budgetary framework
leading to binding three-year expenditure ceilings;
and (iv) the working of independent fiscal
institutions, with a monitoring and analytical role
for the Fiscal Policy Council. The authorities have
recently started to re-examine the adequacy of the
current 1% of GDP surplus target (in place since
2007). Irrespective of the stipulated level of the
numerical rule, the method applied to monitor the
fulfilment of the target is not clarified
unambiguously (currently, multiple indicators are
in use by the government to assess compliance). In
its annual reports, the Fiscal Policy Council has
signalled the issue of non-compliance for several
years, including in 2016.
8.4.
EXCHANGE RATE STABILITY
The Swedish krona does not participate in ERM II.
The Riksbank pursues inflation targeting under a
floating exchange rate regime.
Following the sharp depreciation of the krona
against the euro in 2008, i.e. at the onset of the
financial crisis, the krona recovered at a similarly
rapid pace and by mid-2012 even reached a
twelve-year high of 8.3 SEK/EUR. While this
appreciation was arguably a correction of the
krona's previous weakening, safe-haven flows,
resulting from the intensification of the euro-area
sovereign debt crisis, significantly contributed to
it. Between early-2013 and the beginning of 2015,
the krona was on a depreciation trend, falling
overall by almost 14% against the euro. During the
two years before this assessment, the krona
depreciated against the euro by some 1.6%,
fluctuating around on average 9.30 SEK/EUR.
Graph 8.4:
Sweden - SEK/EUR exchange rate
(monthly averages)
10.5
10.0
9.5
9.0
8.5
8.0
2010
2011
2012
2013
2014
2015
2016
Source: ECB.
Since August 2012, i.e. when the Riksbank started
cutting its repo rate, short-term interest rate
spreads vis-à-vis the euro area have declined. The
interest rate spread even turned negative (euro-area
short-term interest rates being higher than Swedish
ones) in February 2015, when the Riksbank was
among the first European central banks to
introduce a negative policy rate, cutting its repo
rate to minus 0.1%. Three additional cuts to the
repo rate, reaching minus 0.5% after the
Riksbank's February 2016 Executive Board
meeting, widened the 3-months STIBOR-
EURIBOR spread further to about on average -20
basis points during the first four months of 2016.
In December 2012, the Riksbank decided to
increase its foreign currency reserves by SEK 100
billion to reflect higher risks to the Swedish
financial system from an uncertain economic
(
66
) http://ec.europa.eu/economy_finance/
economic_governance/sgp/convergence/index_en.htm
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situation abroad and the increase in commitments
to the IMF. Subsequently international reserves
rose and peaked at about SEK 520 billion in May
2015, an increase by more than 20% since mid-
2014. Early-2016 international reserves averaged
slightly less than SEK 500 billion (a decline of 5%
from the previous' year's peak), representing some
12% of GDP. In December 2015, the Riksbank
introduced the operational framework to intervene
on foreign exchange markets in a timely manner if
needed in order to prevent a de-anchoring of
inflation expectations due to a strengthening krona.
Judging by international reserve statistics
Riksbank interventions have not taken place thus
far, though.
Graph 8.5:
Sweden - 3-M Stibor spread to 3-M Euribor
(basis points, monthly values)
200
Graph 8.6:
Sweden - Long-term interest rate criterion
(percent, 12-month moving average)
12
10
8
6
4
2
0
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Sweden
Reference value
Source: Commission services.
150
100
50
0
-50
2010
2011
2012
2013
2014
2015
2016
Source: Eurostat.
8.5.
LONG-TERM INTEREST RATES
Long-term interest rates declined more than 230
basis points between mid-2013 and April 2015,
reaching an all-time low of 0.3%. In particular the
loosening of monetary policy as a response to the
low domestic inflation environment, the launch of
the Riksbank's asset purchase programme, and
safe-haven flows into Swedish government bonds,
fuelled the compression of Swedish long-term
interest rates, closely following the German
benchmark bond. The announcement of the ECB's
expanded asset purchase programme (EAPP) in
January 2015 and its subsequent launch in March
2015 have led to a gradual re-pricing of investors'
risks perceptions and triggered an abatement of
flows into safe-haven assets, e.g. German or
Swedish government bonds. Yields increased
somewhat but with an average of 0.8% in early
2016 remain very low by historic standards.
Graph 8.7:
Sweden - Long-term interest rates
(percent, monthly values)
4
Long-term interest rates in Sweden used for the
convergence examination reflect secondary market
yields on a single benchmark government bond
with a residual maturity of around nine years.
The Swedish 12-month average long-term interest
rate, relevant for the assessment of the Treaty
criterion was well below the reference value at the
time of the 2014 convergence assessment of
Sweden. Following a slight increase to 2.3% by
May 2014, the relevant Swedish 12-month moving
average long-term interest rate has declined again.
In April 2016, the latest month for which data are
available, the reference value, given by the average
of long-term interest rates in Bulgaria, Slovenia
and Spain plus 2 percentage points, stood at 4%. In
that month, the 12-month average of the yield on
the Swedish benchmark bond stood at 0.8%, i.e.
3.2 percentage points below the reference value.
3
2
1
0
2010
2011
2012
Sweden
2013
2014
Germany
2015
2016
Source: Eurostat.
Very low long-term interest spreads vis-à-vis the
German benchmark bond widened between end-
2012 and autumn 2013 before narrowing again
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Chapter 8 - Sweden
since early 2014. They stood at some 68 basis
points at the end of April 2016 (
67
).
reflecting Sweden's foreign aid and positive net
contributions to international organisations, as well
as remittances transferred by foreign workers in
Sweden to their home countries.
Sweden's large savings-investment surplus
persisted in 2014 and 2015, reflecting high net
savings by the private sector, a limited fiscal
deficit and a low level of residential investment.
As regards the latter, despite a recent rebound in
housing investment, the number of new dwellings
built still does not meet surging housing demand.
Gross national savings reached almost 30% of
GDP in 2014 and 2015, similar to previous years.
While households have increased precautionary
savings following the financial crisis, corporate
and household saving had also risen as a result of
reforms introduced in the 1990s, such as the
introduction of a pension plan with defined
contributions. Gross fixed capital formation
cautiously took up again in 2014, but the uncertain
economic environment is still affecting investment
levels.
Graph 8.8:
Sweden - Saving and investment
(in percent of GDP at market prices)
8.6.
ADDITIONAL FACTORS
The Treaty (Article 140 TFEU) calls for an
examination of other factors relevant to economic
integration and convergence to be taken into
account in the assessment. The assessment of the
additional factors – including balance of payments
developments, product and financial market
integration – gives an important indication of a
Member State's ability to integrate into the euro
area without difficulties.
In November 2015, the Commission published its
fifth Alert Mechanism Report (AMR 2016) (
68
)
under the Macroeconomic Imbalance Procedure
(MIP - see also Box 1.5). The AMR 2016
scoreboard showed that Sweden exceeded the
indicative threshold in four out of fourteen
indicators, i.e. two in the area of external
imbalances (the surplus on the current account, the
change in the export market share) and two in the
area of internal imbalances (the annual change in
the house price index, the consolidated private
sector debt in % of GDP). In line with the
conclusions of the AMR 2016 (i.e. that imbalances
had been identified for Sweden in the previous
MIP round), Sweden was identified as warranting
a further in-depth review, which found that
Sweden continued to experience macroeconomic
imbalances.
8.6.1. Developments
payments
of
the
balance
of
40
30
20
10
0
2010
2011
2012
2013
2014
2015
Gross national saving
Gross capital formation at current prices; total economy
Source: Eurostat, Commission services.
Sweden's current account surplus gradually
declined from its peak of 8.6% of GDP in 2008 to
around 6% over the last years (5.9% in 2015).
While the contribution of services and net primary
income to the current account balance has been
increasing, the trade surplus in goods diminished,
resulting in a relatively stable current account
surplus. The goods trade surplus has remained
slightly above 3% of GDP since 2010 and
Sweden's net international investment position has
been improving successively and is expected to
turn positive in the coming years. Current transfers
have delivered a relatively steady negative impact,
(
67
) The reference to the German benchmark bond is included
for illustrative purposes, as a proxy of the euro area long-
term AAA yield.
(
68
) http://ec.europa.eu/europe2020/pdf/2016/ags2016_alert
_mechanism_report.pdf
A gradual recovery in Sweden's main trading
partners and a relatively weak krona have been
positively impacting Swedish export performance
since 2015. This is projected to improve the
outlook for export-oriented industrial production
and manufacturing investment. Swedish cost
developments do not point to major challenges in
terms of competitiveness. Unit labour costs (ULC)
have been growing in line with Sweden's main
trading partners, while the accumulated ULC
growth was broadly stable between the period of
2001 and 2014. The real effective exchange rate
has depreciated in 2014 and 2015 due to the weak
krona, while domestic prices continue growing
more slowly than in the main trading partners. The
decrease in Sweden's export market share
continued in 2014 as goods exports lost further
ground to international competitors. There has
been a contraction of 9.8% in the previous five
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Table 8.4:
Sweden - Balance of payments
2010
Current account
of which: Balance of trade in goods
Balance of trade in services
Primary income balance
Secondary income balance
Capital account
External balance
1)
Financial account
2)
(percentage of GDP)
2011
6.1
3.6
1.8
2.0
-1.3
-0.2
5.9
8.0
3.0
-5.1
9.9
0.1
7.9
2.2
23.8
29.9
192.9
-10.2
2012
5.9
3.7
1.8
2.2
-1.8
-0.2
5.7
1.5
2.3
-3.1
2.2
0.1
1.4
-4.2
22.6
29.1
187.0
-16.6
2013
6.0
3.6
2.1
1.9
-1.7
-0.2
5.8
3.3
4.4
-8.4
4.7
2.6
0.7
-2.5
22.5
28.0
184.6
-14.6
2014
5.4
3.3
1.8
1.9
-1.7
-0.1
5.2
3.2
0.9
4.2
-1.8
0.0
3.2
-2.0
23.8
28.0
190.6
-2.5
2015
5.9
2.9
2.6
2.1
-1.6
-0.2
5.7
3.2
2.3
-2.1
2.8
0.3
2.9
-2.5
24.5
29.4
181.5
-1.6
6.0
3.9
1.4
2.0
-1.3
-0.1
5.9
7.5
4.2
-3.9
7.4
-0.1
7.7
1.7
22.9
29.6
198.1
-8.4
of which: Direct investment
Portfolio investment
Other investment
3)
Change in reserves
Financial account without reserves
Errors and omissions
Gross capital formation
Gross saving
Gross external debt
International investment position
1) The combined current and capital account.
2) The data is presented under BPM6 methodology, where the signs of financial account items are the opposite as under BPM5
(that was used in earlier Convergence Reports).
3) Including financial derivatives.
Sources: Eurostat, Statistics Sweden, Commission services.
years, continuing a long-term trend that started
already in the 1970s. However, a reversal was
noted in 2015 when Sweden actually gained
market shares.
Sweden's financial account shows relatively large
fluctuations over time but seems to have stabilised
around 3.2% in 2014 and 2015. However, the
financial account balance consistently reflects
Sweden's role as a net FDI investor abroad.
External reserves increased somewhat in 2014 and
2015, following the marked surge in 2013, when
the Riksbank increased foreign currency reserves
by SEK 100 billion to re-align them with the
exposure of Swedish banks to foreign capital
markets. External debt increased from 184.3% of
GDP in 2013 to 190.3% of GDP in 2014, i.e. by 6
percentage points. Again, this development largely
mirrors the increase in the gross government debt
that was due largely to technical factors linked to
changing accounting standards. Sweden's net
international investment position improved
significantly in 2014 and 2015.
According to the Commission services' Spring
2016 Forecast, net exports are expected to
contribute somewhat positively to real GDP
growth in 2016 and 2017, while the current
account surplus is expected to remain stable during
this period.
Graph 8.9:
Sweden - Effective exchange rates
130
(vs. 36 trading partners; monthly averages;
index numbers, 2010 = 100)
120
110
100
90
2010
NEER
2011
2012
2013
2014
2015
REER, HICP deflated
REER, ULC deflated
Source: Commission services.
8.6.2. Market integration
Sweden is integrated with the euro area through
trade and investment linkages. Trade openness of
the Swedish economy remained rather stable at
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Table 8.5:
Sweden - Market integration
2010
Trade openness
1)
(%)
Trade with EA in goods & services
2)+3)
(%)
Export performance (% change)
4)
World Bank's Ease of Doing Business Index rankings
5)
WEF's Global Competitiveness Index rankings
6)
Internal Market Transposition Deficit
7)
(%)
Real house price index
8)
Residential investment
9)
(%)
41.8
17.8
2.0
9
2
0.9
100.0
3.6
2011
42.9
18.6
1.0
14
3
0.6
100.8
3.9
2012
42.0
17.9
-0.7
13
4
0.1
101.5
3.4
2013
39.9
17.4
-2.7
14
6
0.1
106.3
3.5
2014
41.0
17.6
0.3
9
10
0.2
115.4
4.1
2015
41.5
17.7
3.3
8
9
0.4
129.3
4.6
1) (Imports + Exports of goods and services / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics, Balance of Payments).
2) (Imports + Exports of goods with EA-19 / (2 x GDP at current market prices)) x 100 (Foreign Trade Statistics).
3) Trade in services with EA-19 (average credit and debit in % of GDP at current prices) (Balance of Payments).
4) Index for exports of goods and services divided by an index for growth of markets (percentage change on preceding year).
5) New methodology as of 2014 (World Bank).
6) (World Economic Forum)
7) Percentage of internal market directives not yet communicated as having been transposed, relative to the total. (Nov. data, May in 2013 and 2015).
8) Deflated house price index (2010=100), Eurostat.
9) Gross capital formation in residential buildings (in % of GDP), Eurostat.
Sources: Eurostat, World Bank, World Economic Forum, Commission services.
about 41% of GDP in 2014. The main euro-area
trading partners are Germany, the Netherlands and
Finland, while Norway, Denmark and the UK are
the biggest non-euro-area partners.
Sweden has attracted a high share of FDI in the
tradable sector thanks to good infrastructure and a
highly educated labour force. In 2014, more than
80% of the total FDI stock emanated from the EU,
with biggest investments originating in the
Netherlands, Luxembourg and the UK.
Regarding the business environment, Sweden
regularly scores top positions in international
rankings, well above most euro-area Member
States. Following a slight dip between 2010 and
2013, rankings have improved again over the last
two years. Sweden's deficit in the transposition of
EU directives was very low (0.4% in 2015), thus
meeting the 0.5% target as proposed by the
European Commission in the Single Market Act
(2011).
The Swedish labour market, to a large extent
governed by negotiations between social partners
at sectorial level, is characterised by positive
labour market outcomes with high employment
rates. Sweden has one of the lowest wage
dispersions in the EU, with high entry wages and
little wage progression. Employment protection of
permanent workers is rather high (slightly below
the euro-area-OECD countries' average, according
to the 2013 OECD employment protection
indicator) compared to that of temporary workers .
Adjustment by labour mobility is adequate, with a
relatively
low
dispersion
of
regional
unemployment rates. The integration of low-
skilled and foreign-born workers remains the key
challenge for the Swedish labour market, though,
as the employment rate of both groups is
significantly below the overall employment rate.
Sweden's financial sector (accounting for more
than 400% of GDP) is well integrated into the EU
financial sector, especially through interlinkages in
the Nordic-Baltic financial cluster. Subsidiaries
and branches of the Swedish banking groups hold
the majority of the market in Lithuania, Latvia,
Estonia and Finland. They also have substantial
market shares in Denmark and Norway.
Graph 8.10:
Sweden - Foreign ownership and concentration
in the banking sector
70
(in percent, weighted averages)
60
50
40
30
20
10
0
SE, 2010
SE, 2014
EA, 2010
EA, 2014
Concentration in the banking sector (CR5 ratio)
Share of foreign institutions as % of total assets
Source: ECB, Structural financial indicators .
Foreign ownership in the Swedish financial market
is significantly below the euro-area average (about
9% in 2014) but has increased marginally since
2010. At almost 60%, bank concentration
measured by the market share of the largest five
106
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Convergence Report 2016 - Technical annex
Chapter 8 - Sweden
credit institutions in total assets has remained
above the euro-area average for the past years.
The capital adequacy of Swedish banks measured
by standard regulatory ratios is relatively high at
23% in Q3 2015, compared to the euro-area
average (16% in Q3 2015). Moreover, the ratio of
non-performing loans (1.0% in Q3 2015) is only a
fraction of the euro-area average, which between
2010 and Q3 2015 increased by about 2�½
percentage points, reaching more than 6%. High
asset quality, cost-efficiency and market
concentration support the profitability of Swedish
banks, which is among the highest in Europe. The
sector's average return on equity (ROE) in Q3
2015 stood at almost 9%.
Graph 8.11:
Sweden - Selected banking sector soundness
indicators
%
(plus 13 percentage points since 2010), while the
euro-area average decreased to 158% of GDP over
the same period. Outstanding bank credit to non-
financial companies and households reached
almost 130% of GDP (an increase of about 2
percentage points since 2010), compared to 92% in
the euro area. The consolidated stock of private
sector debt increased from 190% of GDP in 2010
to almost 194% of GDP in 2014. This is the sixth-
highest consolidated private sector debt level in the
EU and remains significantly above the euro-area
average of 138%.
Graph 8.12: Sweden - Recent development of the financial
system relative to the euro area
200
(in percentage of GDP)
180
160
140
120
100
80
60
40
20
0
SE, 2010
SE, 2015
EA, 2010
EA, 2015
Debt securities
Stock market capitalisation
Credit to households
Credit to non-financial corporations
25
20
15
10
5
0
SE, 2010
Return on equity
Note: Debt Securities other than shares, excluding financial derivatives.
Source: ECB, Commission services.
SE, Q3-15
Capital adequacy
EA, 2010
EA, Q3-15
Non performing loans
Source: ECB, EC calculations.
House prices in Sweden have been growing almost
uninterruptedly over the last 20 years: real house
prices doubled during this period and surged by
almost 40% since 2008. The growth has been
accelerating since late 2011. While real house
prices grew at an average rate of 4.7% in 2013 and
8.5% in 2014, their increase accelerated to 13.7%
in Q3 2015 compared to the previous year.
Residential investment has picked up only
marginally from 3.6% of GDP in 2010 to 4.1% of
GDP in 2014. Overvalued house prices entail risks
of a disorderly and harmful correction, with a
potential impact on the banking sector and the real
economy. The overall shortage of housing supply
can hamper labour mobility and is further
exacerbated by the large inflow of refugees in need
of affordable housing.
Capital markets in Sweden are very well
developed compared to the euro area. The stock of
quoted shares issued by Swedish enterprises
increased to about 136% of GDP by end-2015 (up
from about 119% of GDP in 2010). It thus
exceeded by far the 2015 euro-area average of
60% of GDP. The total amount of outstanding debt
securities also increased to 172% of GDP in 2015
107