BLACK SEA BLOG: No Romanian holiday for new govt

By bne IntelliNews December 16, 2008

bne -

Romania's incoming coalition government on December 14 signed a protocol that is designed to help the country weather the tough times ahead. While the perpetually squabbling politicians seemed to have finally realised that the economy faces problems, analysts say it's unlikely they have grasped the gravity of them.

The coalition is itself a surprise, as the Social Democrats (PSD), which came second in the elections held November 20, claimed they couldn't get along with President Traian Basescu, the founder of the Democrat-Liberal (PD-L), which narrowly won the elections. More likely was some combination with the third-placed party, the National Liberal Party of outgoing Prime Minister Calin Popescu Tariceanu.

With the two main parties in alliance, the coalition will have a two-thirds majority in parliament, enough to push through the radical measures needed to weather the gathering storm. "The time of rows has passed," PD-L leader Emil Boc declared, though added - perhaps ominously given the turbulence of Romanian politics - that, "we are partners, but we'll be in competition when the time comes for political competition."

The new government's task has been made all the harder by the previous minority government's inability to stop parliament's decision in October to give a pay rise for teachers that was calculated to be in the region of 50%. What this means is that wage pressures will weaken further the country's already deteriorating competitiveness and could drive inflation back above the 10% mark in 2009, compared with the 6.7% annual rate of inflation for November. "This would be the result in normal circumstances, but the Romanian economy is not in normal circumstances right now, and it is highly unlikely that the present credit crunch and the pressure from the international financial markets will leave time for this inflation spiral to run its course. Much more urgent matters are likely to make their presence felt first," says Edward Hugh, a widely read emerging market economist.

Those urgent matters are principally the spiralling twin deficits. Finance and Economy Minister Varujan Vosganian, has warned that the proposed increase could push the budget deficit up in the direction of 7.0% of GDP in 2009. This would put it at more than double the 3.0% figure set under the EU's Maastricht criteria, which Romania must meet to qualify for the adoption of the euro. Tariceanu's outgoing government plans to end 2008 with a budget deficit equivalent to 2.3% of GDP. However, the country's budget gap for the 11 months through November widened to almost 3.0% of GDP due to lower-than-planned revenue. The European Commission said in November it projects a budget gap of 3.5% of GDP for Romania this year due to its loose fiscal policy. In fact, Romania's loose fiscal policy stance and the growing public spending commitments were among the main reasons cited by Standard & Poor's when in October it downgraded Romanian debt to junk status, just two years after the country joined the EU.

Gravity defying

So far, the country's pace of growth has confounded the critics. On December 15, the stats office said Romania's final consumption growth accelerated to 13.7% in the third quarter from 9.0% posted in the same period of 2007, fuelled by domestic spending. GDP growth in the third quarter was an annual 9.1%, just a shade slower than the 9.3% in the second.

While nobody expects the country to maintain such growth in 2009, the government's forecast of 4.5% growth is seen by many now as overly optimistic. Nicolaie Alexandru-Chidesciuc, an economist with ING, predicts that, "in 2009 we could see both a sharp slowdown in growth and a high inflation rate."

How sharp? Given the growing imbalances in the country, there is now a widely held view that the country will experience a hard landing like that suffered in Latvia, where the economy went from growing 8.0% in the fourth quarter of 2007 to shrinking by 4.6% in the third quarter of this year.

As evidence of this, economists point to falling retail sales and consumer confidence and rising bankruptcies in October. Perhaps most worrying is that bank lending appears to have ground to a virtual halt, falling by 0.6% in October, the latest month for which statistics are available from the National Bank of Romania, from the month before, when it rose 4%. "For an economy which has been experiencing a debt-driven consumer and construction boom it is hard to overstate the significance of this single fact," says Hugh. "We seem to have what is known as a 'sudden stop' in aggregate bank lending here, and the Romanian economy may now well fall rapidly into recession, following the tried and tested path so recently pioneered by Latvia and Estonia."

The outlook then is for a sharp slowdown in growth in the first half of 2009, which could turn into outright recession as soon as the third or fourth quarter. The government may also have to join Hungary, Latvia et al in having to turn to the International Monetary Fund for support to help it finance its €59bn in external debt.

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BLACK SEA BLOG: No Romanian holiday for new govt

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