THE ECONOMIST INTELLIGENCE UNIT

 | 

JOAN HOEY

  |  26.06.2014

Outlook for 2014-18: Romania's road to recovery

The IMF and European Commission teams that visited Romania concluded the first and second reviews of the stand-by agreement (SBA), in what was a broadly favourable assessment.

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THE ECONOMIST INTELLIGENCE UNIT



JOAN HOEY

JOAN HOEY

REGIONAL EDITOR, EUROPE at THE ECONOMIST INTELLIGENCE UNIT

Political stability and the quality of governance have been undermined in recent years by unstable coalitions and minority governments.

 

Political stability outlook

In the December 2012 parliamentary election the Social Liberal Union (USL) — the political alliance of the Centre-Left Alliance of the Social Democratic Party (SDP) and the National Union for the Progress of Romania (UNPR), and the Centre-Right Alliance of the National Liberal Party (NLP) and the Conservative Party (CP) — won a resounding victory, winning a two-thirds majority in both chambers.

 

However, the alliance was always at risk of fraying given the inherent policy and personal differences between the two main parties.

 

These came to a head in February 2014 as the two parties fell out over ministerial appointments and accused each other of pursuing independent election strategies. On February 10th the prime minister and SDP leader Victor Ponta announced the formation of the Union of Social Democracy (USD), comprising the SDP, the CP and the UNPR, to contest the European Parliament elections in May 2014 on a separate ticket from the NLP.

 

The government lost its parliamentary majority on February 26th, when the NLP formally left the USL and NLP ministers tendered their resignations.

 

The newly formed USD retained 48% of the seats in the combined chambers, but would have been unstable without the formal support of another party. Parliament approved an interim government nominated by Mr Ponta on March 4th and the new ministers were sworn in at the presidential palace on March 5th, despite earlier speculation that Mr Basescu would refuse to accept the new cabinet. Dubbed ‘Ponta 3’, the government includes members of the Hungarian Union of Democrats in Romania (HUDR) and independents with no parliamentary affiliation. Hunor Kelemen, the leader of the HUDR, was nominated as minister for culture and as deputy prime minister, and Attila Korodi (HUDR), a former minister of the environment in two governments, was nominated as minister for the environment and climate change. The SDP holds 16 ministries (including two previously held by the UNPR). The head of the CP, Daniel Constantin, became deputy prime minister as well as minister for agriculture. Seven independents, largely comprising young professionals in their 30s, were nominated as government ministers. The Economist Intelligence Unit assumes that the SDP will be able to continue in office with the support of the HUDR at least in the short term, if not until the next scheduled election in 2016.

 

Economic policy outlook

POLICY TRENDS .The IMF and European Commission teams that visited Romania between January 21st and February 4th concluded the first and second reviews of the stand-by agreement (SBA), despite their concerns over a failure to reduce arrears and delays to planned increases in excise duties. The failure to meet the target for the reduction of arrears of state- owned enterprises (SOEs) in the final quarter of 2013 was the main criticism made by the mission, in what was a broadly favourable assessment.

 

However, progress in reducing SOE arrears has stalled, and Andrea Schaechter, the head of the IMF mission to Romania, hinted that approval by the IMF board in late April might not be given in the absence of further progress in reducing arrears. Ms Schaechter pointed out that the transport sector, particularly rail-freight and rail- passenger companies, accounted for more than 50% of SOE arrears and required urgent restructuring.

 

The SBA was approved by the IMF board in September 2013 for an amount equivalent to SDR 1.75bn (EUR 1.98bn; USD 2.59bn). The Romanian authorities, who intend to treat the agreement as precautionary, also requested precautionary support of EUR 2bn from the EU. The new programme aims to build on the achievements of recent years by supporting fiscal policy continuity and encouraging further structural reform. It will also provide a reserve buffer, given that the economy is subject to volatile capital flows and remains vulnerable to external shocks.

 

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