Nicolaie Alexandru-Chidesciuc of ING -
On Sunday, November 30, Romania will hold parliamentary elections. The ballot will be a first, as the voting will be uninominal (electing people, not parties), even though the redistribution of seats will take into account the percentage obtained by parties at the national level.
Until recently, most of the polls, including the results of the local elections, were pointing to the Democratic Liberal Party, the president's party (PD-L) as the winning party. However, the situation changed significantly during October-November and the Social Democratic Party (PSD) gained ground for two reasons. On the one hand, the economic crisis is having a more detrimental impact on low-income households, thus likely increasing the support for socialist politics. On the other hand, the PSD has aggressively promoted increases in pensions and teachers' wages.
Regarding the latter, all the party programmes supported pension and wage hikes, without adequate solutions to counteract the impact of the global crisis on Romania. Nevertheless, recently the ruling National Liberal Party (PNL) has adopted some measures to offset the crisis - though steps to cut spending on pensions and wages during 2009 could have been taken given the external view on Romania and the rating downgrades - and has also strongly opposed the 50% increase in teachers' wages. The latter likely brought voters to the PNL from the PD-L. However, as more and more voters dislike the party strategies, the number of both undecided and people not planning to vote has increased considerably - from 26% during November 10-14 to about 30% during November 17-21, according to BCS. Given that the PSD's electorate is more stable, this party has the most to gain from such a development.
Therefore, we expect little improvement in the political environment after the November 30 elections and the instability could even increase, as a political majority is not expected and the president stated that only he can choose the next PM if no party gains more than 50% of the votes (which is highly likely looking at the polls). Therefore, a new impeachment procedure against the president might be launched and the forming of a new government might be a lengthy process, while Romania needs exactly the opposite.
Of polls and bonds
The parliamentary elections could also have a negative impact on government debt issuance plans, as polls show no political party benefits from majority support.
Although the 2009 debt issuance plan has not been set yet, the head of the Ministry of Finance's treasury stated the current budget deficit target would require issuing instruments worth RON16bn and EUR500m to the foreign markets.
According to official GDP projections, the targeted budget deficit for next year is around RON11.6bn. While the bulk of fiscal spending is permanent in nature (wages and pensions), our forecast assumes budget revenues will be pressured by the decelerating economic activity, which is likely to be severely impacted by the sharp deceleration in credit growth and negative Eurozone growth. This should lead to an estimated fiscal gap of about RON30bn.
A delay in establishing a clear issuance strategy will probably prove costly as it has already proved this year. After tapping the market for modest amounts compared to its plan in the first three quarters, the MoF switched strategies and grabbed liquidity with both hands. More than 40% of the money taken by the MoF from the market this year has been borrowed in the last two months and this has pushed the yield curve upwards by about 2.5ppt. The head of the treasury has stated they will not pay yields above the central bank credit facility of 14.25% and that they will concentrate on short-term paper. At the last auctions for T-bills the maximum yield paid was 14.25% for 3M and 6M instruments and 14.2% for 1Y T-bills. As the availability and cost of funding becomes an increasing concern for market players, the MoF may find it hard to find liquidity below this level. It is likely that the MoF will continue to pay higher and higher yields, as its strong demand for funding will be met with reluctant lenders, and surpassing the central bank's credit facility in the short term.
Nicolaie Alexandru-Chidesciuc is Senior Economist at ING
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