Romanian ruling coalition's rhetoric on 2nd pension pillar depresses already bearish market

Romanian ruling coalition's rhetoric on 2nd pension pillar depresses already bearish market
Until the revelations about the government's plans for second pillar funds, the BET had been growing faster than its European peers.
By Iulian Ernst in Bucharest May 22, 2018

Romania’s stock exchange indices dropped another 1.7%-1.8% on May 21 amid rumours about government’s plans to change the architecture of the second pillar of the pension system — an important contributor to the local equity market. 

Majority leader Liviu Dragnea has made rather confusing statements about “suspending the contributions to the 2nd pillar”, but this was enough to trigger investors’ negative sentiment.

All the blue chips were in the red, with the deepest plunges posted by the stocks of Bucharest Stock Exchange itself (-5.0%), oil transport company Conpet (-3.51%) and natural gas transport operator Transgaz (-3.45%). Banca Transnilvania's shares also lost 2.45%.

Amid an already bearish market, yesterday’s decline added up to a 6.6% decline of the blue chip BET index versus this year’s peak seen on April 26 after the bright dividend season pushed up prices at a record rate among European exchanges during the previous months.

The message sent by the government about the future of the second pension system pillar is confusing, and it seems to be based on two different facts: firstly, the government’s need to finance the widening budget deficit and, secondly, the ruling party’s idea that the second pillar is deeply wrong and deserves to be dismantled for the good of “the people”.

The former cause generating the dispute about the second pillar (estimated to receive some 0.8% of GDP per year in contributions, after the wage rally in recent years) is aggravated by the expected economic slowdown. GDP growth fell to around 4% in Q1, which is a robust rate though below the 5.1% envisaged by the government when it estimated budget revenues this year. International financial institutions have no doubt Romania's budget deficit will exceed 3% of GDP in 2018.

The latter reason behind the ruling coalition’s comments about the second pillar was best expressed by Dragnea, freely speaking about the issue on May 21: “… I want everybody to understand that we do not talk about private money […] it’s the money we all contribute to the pension system, that is paid to the public pension system. 3.75% of this goes to the second pillar”. 

His rhetoric is misleading, and the inaccurate figures are the least of the concerns: 3.75% of the gross wages of individual contributors go to the second pillar, not 3.75% of the contributions to the public pension system. In this respect, the money is private and this is probably what prompted the major concerns among investors on May 21: the leader of the ruling coalition stressing that the money invested on the stock exchange is not private money, with the implication that it can be confiscated at any time or used in a different way by the state. But Dragnea's statements clearly describe the second pillar as public money, that is hence likely to be used at the will of "the people".

News

Dismiss