FACTBOX-Key political risks to watch in Romania

By Sam Cage

BUCHAREST, July 1 (BestGrowthStock) – Recession-hit Romania, the
European Union’s second-poorest member, is having to take
increasingly tough measures to stick within strict International
Monetary Fund requirements for an economic bailout package.

The southeast European country had the fastest economic
growth rates in the EU until a real estate and credit bubble
burst in 2008. It now faces rising unemployment and social
unrest against painful spending cuts and tax rises.

Its economy, which contracted more than 7 percent last year,
is still mired in recession and dependent on a 20 billion euro
($24.47 billion), IMF-led rescue package requiring strict
control of spending and the budget deficit.

Below are the main political risks for Romania:

IMF FUNDING

The IMF has put the latest tranche of aid for Romania on
hold pending spending cuts and tax rises that will be tough to
push through but are needed to meet this year’s fiscal gap
target of 6.8 percent of gross domestic product.

The government is proposing slashing public wages by 25
percent and raising value added tax by 5 percentage points to 24
percent. A plan to cut pensions was declared illegal by the
constitutional court and the tax hike replaces those savings.

Demand for Romania’s debt plummeted and the cost of insuring
it rose when the IMF deal was put on hold due to a political
crisis in 2009. The leu currency also fell (EURRON=: ), indicating
how sensitive markets are to any hold-up in the payments.

Romania is again struggling to sell debt at yields it is
willing to pay, and the leu and blue-chip stocks (.BETI: ) fell
after the constitutional court ruled against the pension cuts
last month, again endangering the IMF deal.

Any further delay or suspension in aid disbursement is
likely to lead to another slide in markets.

What to watch:

— Will the combination of pay cuts and VAT hike appease the
IMF when its board meets this week to discuss the disbursement
of the latest aid tranche?

— Will Romania succeed in bringing the budget deficit
within the IMF target for 2010?

— Can it get debt auctions moving? It has failed to shift
one-, three- and five-year paper since May 6 and has sold less
than planned at other auctions.

GOVERNMENT STABILITY

President Traian Basescu was re-elected in a close and
disputed ballot in December. He named centrist Emil Boc as prime
minister. Boc is backed by ethnic Hungarians and independents,
whose support he needs for a majority in parliament.

That ended a three-month long political crisis and led to a
resumption of the international aid deal, boosting the leu and
reducing the cost of insuring Romania’s sovereign debt.

Greater political stability also gave the central bank room
to cut interest rates to a record low to kickstart the economy.
But Boc only narrowly survived a no-confidence vote filed by the
leftist opposition last month over his planned cuts.

His majority is very fragile and analysts say the opposition
could well win a fresh no-confidence vote, though it may prefer
not to take power at such a difficult time when more spending
cuts and unpopular reforms are needed. [ID:nLDE65R02C]

What to watch:

— The opposition aims to file a fresh no-confidence motion
in Boc’s government, which it could probably win. A defeat for
the government would cause a full-blown political crisis and
probably send markets into freefall. [ID:nLDE65E06I]

— Coalition partners, particularly independents, could
withdraw support for Boc, meaning he would have to negotiate
legislation — including badly-needed judicial reforms — on a
bill-by-bill basis.

— Basescu could replace Boc, whose unpopularity is growing
because of the proposed austerity measures. But any new prime
minister would be likely to have the same difficulties
commanding a functioning majority.

PROTESTS AND STRIKES

Some 30,000 people rallied in Bucharest on May 19 against
deep public spending cuts, casting doubt on the government’s
ability and willingness to force the measures through.

The leu and blue-chip stocks fell on the protest, and the
cost of insuring Romania’s sovereign debt rose.

Trade unions have promised more action to try to force the
government to abandon its plans, but a planned one-day general
strike in early June failed to gain traction.

In dozens of rallies around Romania over the past two
months, protesters have chanted “Down with the government”, but
unions have so far not publicly backed this demand.

What to watch:

— Can unions can gain enough backing for general strikes
and to extend them beyond one day? Short-term action is unlikely
to have a significant impact on markets but a prolonged national
strike — possible if resentment grows — would raise pressure
on the government and finances and eventually dent asset prices.

— Feelings on the street are running high, and many
protesters say demonstrations could grow and turn violent, which
would increase the impact on foreign investors.

STALLING RECOVERY

The economy is still in recession after shrinking 0.3
percent in the first quarter from the previous three months. The
government, international organisations and economists have all
cut their forecasts and most now expect GDP to contract in 2010.

Prospects of recovery are undermined by scarce foreign
direct investment which halved in January-March, and a collapse
in property prices which economists say have not yet hit bottom.

Investors are also concerned about the possible impact of
Greece’s debt crisis, which could mean Greek banks pulling
funding for their Romanian subsidiaries.

What to watch:

— Will the central bank start tightening monetary policy
due to fear of the rise in VAT pushing up inflation?

— Will higher prices dampen spending and delay recovery?
There is significant doubt Romania can finally pull out of
recession in the second quarter.

— Any sign of Greek banks pulling in their horns to shore
up their own balance sheets. Romania has borrowed some $19
billion from Greek banks, equivalent to some 14 percent of total
2009 gross domestic product.

— Central bank intervention in currency markets to prevent
sharp swings in the leu currency.

CORRUPTION

Romania shares the top spot among EU countries in rankings
of perceived corruption and its failure to fight graft poses a
risk to austerity measures and to the IMF-led aid deal, both
vital to economic recovery and investor confidence.

Bucharest has not only failed to make any progress since an
EU report in March but has gone backwards — passing legislation
that made a Brussels-backed anti-graft body that checks
politicians’ wealth virtually impotent. [ID:nLDE63P0PV]

It has yet to convict a minister for corruption but has
finally adopted new criminal and civil procedure codes that
should smooth prosecution and speed up court decisions.

What to watch:

— A fresh EU report on Romania’s judicial progress is due
in July and is likely to be critical. The harshest punishment
the commission could enforce would be a temporary stop to
recognition of Romanian court decisions in the EU, which could
be a further deterrent to investors.

— Will prosecutors convict a top-level official for
corruption, thus sending an important signal that graft will no
longer be tolerated? This would probably not move asset prices
in the short term but would send an important signal that
Romania is becoming an easier place to do business.
(Editing by Paul Taylor)

FACTBOX-Key political risks to watch in Romania