Acute political instability, risk of insolvency and lack of political transparency with misuse of funds and electoral fraud are the crucial risk factors that could hinder economic recovery in Romania.


 

 



I. Acute political instability

 

Romania’s current political crisis has reached an impasse that could drive the nation to near-bankruptcy if the IMF decides to delay the next tranche of its loan to the country (see next item). The partisan logjam will remain unresolved until the conclusion of the two-round presidential elections set for November 22 and December 6.

 

Romania’s $20 billion loan agreement with the IMF, the EU and the World Bank in March left political leaders in a tough spot. The loan’s terms impose strict fiscal obligations that limit the government’s options for easing the effects of the economic crisis. Parties in the “grand coalition” that signed the IMF agreement, the Democratic Liberal Party (PD-L) and the Social Democratic Party (PSD), had to abandon most of the populist promises they made during the 2008 election campaign and take concrete steps to reduce state spending. This led to animosity between the governing parties and the trade unions. Social discontent, strikes and anti-government demonstrations followed, along with a slight loss of popularity for the coalition. These conflicts, combined with fears of a further loss of public support, culminated in the break-up of the grand coalition in October.[1] The presidential election itself was one source of intra-coalition antagonism: When President Traian Basescu fired PSD Interior Minister Dan Nica on October 1, the Social Democrats lost control of the ministry that manages elections and is viewed by many as having a role in their outcome. The PSD used Nica’s dismissal as a pretext to leave the coalition without any loss of face.

 

Presidential candidate and PSD-leader Mircea Geoana took an enormous risk when he decided to leave the grand coalition. So far, his gambit seems to have paid off: Geona has now snatched the lead from his main opponent, President Bãsescu, in opinion polls. Geoana’s populist rhetoric resonates well with the public, while Bãsescu’s approval ratings have dipped. Moreover, according to a recent poll, 32% of the electorate blames the president for the incompetent government of Prime Minister Emil Boc, whose measures aggravated the domestic impact of the economic crisis.

 

 

 

Source: Insomar

 

 

The political impasse shows no signs of letting up, while political demonstrations of force and unwillingness to compromise threaten to undermine political stability. The current interim minority cabinet is unable to govern efficiently since it lacks the parliamentary support it needs to make urgent crisis-management decisions. Political shortsightedness and Basescu’s inability to cooperate with the opposition has thus paralyzed the country politically.

 

The state of affairs is clearly disadvantageous to Bãsescu. At the moment, his main goal is to prevent the opposition from scoring any kind victory, especially before the presidential elections:

  • Bãsescu will avoid naming PSD-PNL-UDMR-backed Klaus Johannis as a PM candidate because this would constitute a defeat for him.
  • The president’s first PM-nominee, Lucian Croituru, failed to gather enough support from the opposition-controlled legislature. His second PM candidate, Liviu Negoita, is set to be rejected as well, since the opposition holds 65% of the mandates in the legislature.
  • At the same time, the president effectively ruled out the possibility of an early election, declaring that if lawmakers reject Croituru, he will put forward yet another nominee rather than dissolve Parliament.  This will presumably lead to further dips in his popularity figures, as the majority of Romanians favor Johannis for Prime Minister.

 

 

Source: Insomar

 

 

Consequently, the interim government will stay in power until the elections. The identity of the next prime minister depends on the outcome of the presidential poll. Should Bãsescu manage to win a second term, he may use his strengthened legitimacy to pressure the opposition into accepting his pick for PM. Yet situation will remain complicated even if Mircea Geoana wins the presidency: His recent statements indicate that he is more open to collaborating with the PNL than with the PD-L, but he also left the door open for a new grand coalition. Tactfully, Geoana has not yet indicated his PM preference: If he becomes president, the field of PM candidates will presumably widen, meaning Johannis will no longer be the only alternative. This only makes the present atmosphere of uncertainty worse. 

 

Investors, unsure about how the political landscape will look a month from now, are queasy. Unanswered questions about long-term economic policy make it hard to make long-term decisions and kill strategic planning. Political instability (elections at the end of 2008, a fragile coalition, followed by the government’s collapse) played a significant role in the drastic drop in foreign direct investment in the first half of 2009, exacerbating the general downturn that came along with the economic crisis.

 

The lei weakened 15% against the euro between September 2008 and January 2009 , followed by an additional 5% depreciation this year. Financial markets reacted wildly to news of the coalition break-up: The lei weakened 1.22% against the euro and almost 2% against the dollar on October 1. The change in Romania’s credit default swap spreads reflected greater fears of state bankruptcy: In the six weeks since the government collapsed, Romania’s CDS prices have risen 85 basis points.

 

 

II. Risk of Insolvency

 

 

Political instability endangers the fulfillment of the IMF conditions and can delay the loan’s next installment. The money is crucial for the crumbling Romanian economy: Without it, the state will be unable to meet its payment obligations. The government is still incapable of covering social expenditures from its own sources, thus half of the IMF loan is spent on public salaries and pensions. At the same time, emerging political risks have made it even more difficult to get a bank loan and can raise interest rates to extreme heights.

 

After quitting the coalition, Geoana was buoyed by a wave of popular discontent over the IMF conditions, which include painful and deeply unpopular measures: massive public-sector layoffs, a unitary pay law for public workers and pension reform, among others. The ongoing presidential campaign can also delay the government’s fulfillment of the IMF conditions because none of the parties want to take responsibility for the austerity measures.

 

The three most important conditions that Romania must meet in order to receive the next segment of the IMF-EU-WB loan are: 1) A 2010 budget 2) Spending cuts, especially in pensions 3) Passing a unitary pay law. While the unitary pay law has been passed, political support for the budget and pension reform is uncertain.

 

At first, the political gridlock prompted the IMF to recommend delaying its second review of the so-called Stand-By Arrangement (SBA) with Romania, which is a prerequisite for releasing the third tranche of credit. However, Romanian politicians managed to persuade the Fund to proceed. The conclusions of the discussions were mixed. The IMF released a statement that on one hand commended the country for meeting most of its targets, but on the other hand, it noted critical deficiencies.

 

The fuss surrounding the budget put Romania in a Catch-22 situation and raised fears that it might break the IMF’s conditions: Only a permanent government has the right to present a draft budget, yet a budget is one of the IMF’s requirements for releasing the third part of the loan. In a rare example of consensus, Parliament passed a resolution on November 10 granting an exception to the rule. However, the law faces new delays because Basescu (while talking permanently about the importance of getting the IMF loan) has indicated that he does not want to sign it. Parliament can overrule the president, but the process will take time.

 

Other issues included the still-unapproved pension reform and fiscal discipline laws. Also, the government needs to furlough state employees without pay for 8 days (previously 10 days) at the end of 2009, a move that is projected to lower the budget deficit by around RON 1.28 bln, or 0.2% of GDP.

 

The carefully worded statement also notes that a new IMF mission will return to Romania once a new permanent government is sworn in. Due to the legislative delays, the third tranche will be delayed by at least one month, meaning it will be released in January 2010 at the earliest. The IMF will probably accept that the budget deficit will run higher than the recently revised goal of 7.3% of GDP. Still, both the international financial institutions and private investors are growing increasingly dissatisfied with Romania’s apparent reluctance to meet the target. It is possible that some measures have been delayed for technical reasons: Labour Ministry State Secretary Mihai Seitan told Mediafax that the unitary pay law and the law on the reorganization of public institutions came into force too late to have any impact on the deficit (The laws were delayed after some lawmakers decided to challenge them in the Constitutional Court).  

 

In addition to the delayed measures, the deteriorating economy also made it impossible for the government to keep the budget deficit under control. The IMF initially agreed to a 2009 target of 4.6% of GDP; however, it became evident over the summer that this target was unrealistic in light of the economic developments in the first half of 2009. They revised the goal to 7.3% of GDP, but political instability and the government’s failure to enact the IMF-mandated measures in a timely manner made this unattainable as well. The IMF and Romania have now revised the target for a third time 7.8% of GDP. Still, the deficit may easily surpass this.

 

 

 

Source: Ministry of Finance, IMF

 

 

 

 

Source: International Monetary Fund, Mediafax

 



III. Lack of political transparency, misuse of funds and electoral fraud


 

Malfunctioning political institutions and weak political standards can undermine the legitimacy of democratic institutions and erode the whole system. In Romania, studies have found that the frequent failure to uphold social and political norms feeds a strong cynicism among both voters and politicians. It creates a socio-economic context where breaking the rules is “normal” and individuals’ trust in institutions, politicians and their fellow citizens is extremely low.

 

Widespread corruption is a major (but not unique) problem in the Romanian political system. Vote-buying – a typical symptom of political corruption – poses serious problems. This practice (for example, illegal food-for-votes “programs” during elections) is widespread, as the European Commission reported this summer.[2][3] Moreover, the central role of the Interior Ministry in the organization of the elections raises concerns over electoral fraud. The public therefore questions the validity of elections and often has little faith in the legitimacy of their elected officials.

 

The EU members with the worst corruption  ranking on Transparency International’s Corruption Perception Index (CPI) are Romania and Bulgaria. The World Bank’s World Governance Indicators also underscore the high level of corruption in the country. Romania’s Control of Corruption index is significantly lower than other regional countries’ (except for Bulgaria). In other indices related to the battle against corruption, such as Rule of Law and Government Effectiveness, Romania is lagging behind its neighbors and closest competitors. Curbing corruption is impossible if the legal system is weak and enforcement is sporadic: It robs the law of its powers of deterrence.

 

The high level of corruption has a negative impact on the utilization of EU funds as well, since it impedes the goal of structural and operational modernization for which the funds were intended. One of the European Commission’s recurring criticisms toward Romania is its lack of strong action to combat this problem. If Romanian lawmakers do not start to address this worrisome problem in earnest, future investments may suffer or the EU may freeze funds (see the example of Bulgaria). The cases of socialist ex-Prime Minister Adrian Nastase, former Environment Minister Nicolae Nemirschi and former Youth and Sports Minister Monica Ridzi highlight the issue of political corruption perfectly. Nastase has been charged with bribery, while two ex-ministers are accused of misappropriating state funds.

 

 

 


[1] See our previous Flash Report: Crumbling Coalition in Romania.

 http://www.riskandforecast.com/post/flash-report/crumbling-coalition-in-romania_275.html

 

[2] Report from the Commission to the European Parliament and the Council on Progress in Romania under the Co-operation and Verification Mechanism {SEC(2009) 1073} /* COM/2009/0401 final * (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2009:0401:FIN:EN:HTML)

 

[3] http://www.nytimes.com/2009/07/23/world/europe/23briefs-Brussels.html