Romania Outlook for 2008-09

Martie 2008

JOAN HOEY - Senior Analyst, Central and Eastern Europe THE ECONOMIST INTELLIGENCE UNIT

 

Political outlook

Domestic politics

The minority government – led by the prime minister, Calin Popescu Tariceanu, and comprising the National Liberal Party (NLP) and the Hungarian Democratic Union in Romania (HDUR) – will continue to depend on the support of the former communist Social Democratic Party (SDP) to enact legislation. The SDP has again demonstrated its parliamentary power by forcing significant amendments to the draft budget for 2008. Meanwhile, the merger of two centreright opposition parties, the Democratic Party (DP) and the Liberal Democratic Party (LDP), to create the Democratic Liberal Party (DLP) is intended to establish a strong centrist party to support the president, Traian Basescu, in his battle with the prime minister and the NLP.

The Economist Intelligence Unit expects the government to serve out its term, until the parliamentary election scheduled for 2008. Pressure to pursue populist policies will be strong in the run-up to the election and the government’s weak parliamentary position will mean that more prudent economic policies are postponed and reforms stymied. Without significant changes in the voting system, another coalition or minority government is likely after the 2008 election. Whatever the political complexion of the next government, we expect that it will undertake a tightening of fiscal policy from 2009.

International relations

The European Commission has criticised the government for the slow pace of judicial reform and measures to counter corruption since Romania joined the EU in January 2007. In September the Commission president, José Manuel Barroso, said that the government must intensify measures to fight corruption and ensure the independence of the judiciary, but Commission officials have become increasingly frustrated at Romania’s lack of progress. The Commission is expected to publish a highly critical interim report on the government’s judicial reform efforts in early 2008. This could result in the activation of safeguard clauses by the EU in June. The deadlock between the president and the prime minister over the replacement for the justice minister, Tudor Chiuariu, who resigned in December to contest an anti-corruption investigation, will cause further alarm. The EU has also expressed concern at Romania’s non-compliance with a number of EU policies, including car registration taxes and competition, but decided not to enforce the safeguard clause on agriculture, after the Commission ruled that the government had made sufficient progress in overcoming deficiencies in its IT systems for administering agricultural payments. However, the Commission has sent an audit team to Romania to monitor the system and will demand repayment of any misallocated payments.

 

Economic policy outlook

Policy trends

The momentum for reform in critical areas of economic policy – including labour markets, competition policy and agriculture – has slowed since Romania joined the EU in January 2007. The government has also failed to address the risks posed by lax fiscal policy, wage growth in excess of productivity and the burgeoning current-account deficit, despite advice from the IMF and the EU of the risks in continuing with current policies. This neglect has contributed to rapidly rising inflation and growing external deficits. There are now signs of a growing loss of investor-confidence, as reflected in the persistent depreciation of the leu and falls in stock-market indices.

In the past, large external deficits have been mainly covered by inflows of foreign direct investment (FDI). However, FDI coverage of the current-account deficit in January-October 2007 was just 45%, compared with 90% for 2006 as a whole. The expected decline in privatisation receipts in 2008-09 will increase Romania’s external vulnerability, unless action is taken to reduce the deficit. Despite pressure from the National Bank of Romania (NBR, the central bank) to tighten fiscal policy in response to the deteriorating situation, the government approved expenditure proposals that took the 2007 consolidated budget deficit up to 2.4% of GDP as well as a significant increase in the minimum wage. The government’s programme for 2008-09 includes an increase in the projected consolidated budget deficit to 2.7% of GDP in 2008 and increased expenditure on social programmes which will not be covered by increased revenue. If pursued, these policies will generate greater inflationary pressures and larger current-account deficits. Under such a scenario, there is an increased risk of a growing loss of market confidence, leading to a sudden capital outflow.

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