Possible tax hikes

We remind that the IMF mission is doing an assessment of Romania economy and by this Friday should come to an agreement with the government. According to local media, so far there is no official statement with respect to future tax hikes. Neither IMF officials have commented on this issue so far. Moreover, in our opinion the level of tax hikes (VAT to 24/25% and income tax to 20%) represent just one of the scenarios that IMF and the government officials have been analysing, hopefully the worst case scenario. Therefore, it is too early to take into account such high increases in tax. What surprised the market was also the discussion of an increase in the income tax, since the officials have been assuring that hiking the income tax is out of question. Thus, based on the latest developments, a simultaneous increase in VAT and income tax is becoming more of a certainty, especially taking into consideration that the government is reportedly asking for the 2010 budget deficit target to be increased from the agreed 5.9% to 6.9%.

In our opinion, there is a high probability that VAT and the income tax might be increased starting the second half of 2010, however, to a much lower levels that the one mentioned above. Even under smaller tax hike scenario, the economic growth will be negatively affected with an economic contraction becoming more of a certainty. Therefore, we expect further negative market reaction.