Romania ended 2016 with an impressive growth of around 4.8%. The new government, formed by the leftist alliance of Social Democratic Party (PSD) and the Alliance of Liberals and Democrats (Alde) hopes for 5.2% y/y growth this year, but independent projections are more cautious. The state forecasting body CNP revised upward its forecast in line with government’s expectations but this was viewed as a possible interference of the new government in the activity of the forecasting body. The European Commission came up with a more cautious projection [4.4%] and furthermore warned of fiscal slippage risks. It urged the government to come up with credible steps to address the issue, which we see as rather unlikely.
The main issue on the country’s economic and political agenda is the uncertainty prompted by the first actions of the PSD-Alde majority coalition, which replaced the government of technocrats of Prime Minister Dacian Ciolos.
Politically, the government attempted to endorse two emergency ordinance in favour of corrupt politicians. It was a bizarre attempt given the visible setback it would have created in the judicial reforms. The attempt failed amid mass protests, but this set the ground for broad conflict between the ruling majority and judiciary institutions. The Constitutional Court admitted on February 27 the existence of a conflict between Prosecution Offices and Government. President Klaus Iohannis stepped into the debate in defence of the rule of law thus becoming the main political enemy of the ruling coalition.
The majority’s leader Liviu Dragnea seems confident of his robust popular support, but [despite generous wage and pension hikes] this confidence may not be justified and further steps in this direction could severely damage the credibility of his party and its coalition partner Alde down to the point where calling early elections would be politically justified.
Economically, the government grounded its budget planning on very optimistic projections, in order to accommodate the promised social spending. Its projections are based on risky assumptions of abundant transfers from the EU and a thriving labour market driven by robust GDP growth revised up 0.9pp to 5.2% y/y by the state forecasting body as part of the budget planning process. If these fail to materialise the deficit could rise above the 3% threshold.
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