Romania govt split risks return of populist policies

By bne IntelliNews March 3, 2014

Andrew MacDowall in Belgrade -

Romania has had its fair share of political dramas in recent years, including street protests that triggered a parliamentary coup, repeated attempts to impeach the president, highly-controversial constitutional changes and ongoing infighting among political bigwigs. The latest, the breakup of the coalition, is unlikely to trigger major political or economic problems - for now at least. But in a double election year, a tendency to populist polices and measures that invigorate the left-wing government's base are likely.

On the night of February 25, Crin Antonescu, the speaker of Romania's upper house of parliament and leader of the National Liberal Party (PNL) announced that he was withdrawing his party from the government, in which it was the second-largest force. Antonescu's move leaves Prime Minister Victor Ponta and his Social Democrats (PSD) without a parliamentary majority, and has led to a scramble to find new coalition partners.

Antonescu had been threatening to join the opposition benches for some weeks due to disagreements over ministerial positions. His decision to do so should be seen in the context of European elections set for May and a presidential poll in November. The Liberal leader is his party's candidate for the presidency, and the coalition's split may now clear the way for Ponta to stand for the PSD. The role of president is a significant one, with the right to veto laws, name governments and a degree of foreign policy clout, hence the PSD's repeated attempts to oust the current incumbent, pugnacious rightist Traian Basescu, who must step down this year.

Few expect the government to fall altogether in the short term at least. Ponta has already been manoeuvring smaller parties into an electoral alliance, and is likely to restore a small majority by bringing in new partners, most probably in the shape of the ethnic-Hungarian UDMR. The UDMR has often been a kingmaker in the past, and its leaders have responded enthusiastically to Ponta's overtures.

Thus the immediate political risk is likely to be moderate, though the volatility-prone Romanian currency, the leu, did dip slightly further on the news. The leu has already been under pressure as investors back away from emerging-market currencies in anticipation of the US Federal Reserve's tapering of quantitative easing, prompting Romania's central bank to intervene to prop up its value.

The day after the PNL's withdrawal from government, President Basescu moved swiftly to approve a International Monetary Fund (IMF) and European Commission review of a loan worth €4bn. Basescu had previously refused to approve the deal review. Analysts say the IMF/EC deal should bolster investor confidence by support Romania's budget and encouraging fiscal and structural reforms, including long-delayed privatisations. "I think there won't be any major changes in the fiscal policy given the IMF deal," Romanian economic commentator Cristian Pantazi tells bne.

However, Pantazi does expect the government to row back from some aspects of reform, due to its weaker parliamentary position and leftish slant. "We can expect the government drop plans for lowering the social contributions paid by the employers, a measure backed by the Liberals," he says. "Also, given the fact that the new government is centre-left oriented, we can expect some populist measures in this double-election year."

The government has already made one marginal move, increasing mayors' salaries - important for electoral mobilisation in the provinces. Pantazi adds that it's worth keeping an eye on the underground struggle for control of the central bank, currently headed by widely-respected technocrat Mugur Isarescu.

On the other hand, the government's loss of its large majority means that it is likely to be less able to implement authoritarian measures and policies that undermine independent institutions, as it has been accused of doing in the past. "We do not believe the short- to medium-run bullish macroeconomic story will be altered by this move and that the budget... can remain on track," Nomura Global Markets Research said in a note.

Romania has indeed been performing strongly of late, racking up a remarkable 5.2% GDP year-on-year growth in the final quarter of 2013, while clocking record-low inflation. Exports have picked up, and the success that the country has had in paring back the deficit has won plaudits. This is the largest economy in post-communist Southeast Europe, and one of the most diversified.

However, Romania seems unlikely to maintain its recent stellar performance - BCR, the country's largest bank, forecasts 2.3% growth for this year, pointing out that domestic consumer confidence remains weak. The economy's spike towards the end of last year was boosted by a strong agricultural harvest - a vulnerable factor that continues to be a major contributor of the country's performance.

Finally, Antonescu's exit from government is a reminder to investors that Romanian politics are fickle and fluid. While the PM is relatively secure for now, it is not a certainty that Ponta will serve out his full term to 2016.

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