Fiscal Risks Rising
BMI View: Romania's long-term fiscal reform agenda is being threatened by growing domestic antipathy to austerity and a weaker EU. At present we forecast a narrowing of the fiscal deficit over the next decade, but no return to surplus, and downside risks to our forecast are growing.
We believe it will be hard for Prime Minister Victor Ponta to meet the fiscal deficit target of 3.0% of GDP in 2012 given the country's weak economic outlook, and therefore hold to our 3.2% of GDP fiscal deficit projection. Nevertheless, there are signs that despite Ponta's anti-austerity rhetoric prior to coming to power, over the next few months his administration will keep expenditure in check, a trend that we expect to broadly continue into 2013, in line with our 2.0% of GDP deficit forecast.
|Still On Consolidation Path|
|Romania - Nominal Fiscal Deficit, % GDP|
For starters, Romania's Senate ratified the EU fiscal treaty in May this year, which implies political impetus to stick to fiscal reforms implemented under the previous administration. This outlook is reinforced by recent IMF and EU assessments, which suggest that Ponta's administration is committed to pushing ahead with further reforms. Even the 8.0% public sector wage increase in June and the scheduled 7.4% increase in December this year are justified according to the EU Commission, thanks to the additional 0.3% of GDP 'fiscal space' provided by increased dividends from state-owned enterprises to date in 2012.
Our Pharma team is also impressed with Ponta's focus on getting urgently-needed healthcare reforms in front of congress before the November 2012 legislative elections, which we believe increases the chance of the reforms being passed. From a broader fiscal perspective, successful healthcare reform would be a major step in the right direction, as both domestic and multilateral actors have long pointed towards Romania's public health care burden as the most pressing threat to the sustainability of the fiscal accounts.
Political Ambition And Waning EU Influence Threaten Reforms
Despite signs of a commitment to further reforms, we believe that risks to our relatively optimistic longer-term fiscal forecasts - which project the nominal fiscal budget shortfall to reach 0.2% by 2019 - are growing. In our view the two mains risks come from Ponta's political ambition and the waning influence of the EU.
|USL Seeking To Tighten Grip|
|Romania - Composition Of Chamber of Deputies, Number of Seats|
As for political ambition, we believe Ponta's Social-Liberal Union (USL) coalition is looking set to tighten its grip on the lower house in the upcoming legislative election. Although Ponta has recently outlined his support of the EU-IMF fiscal reform agenda, his popularity among the Romanian electorate has been largely built around his criticism of the previous administration's austerity drive. This implies expectations of more accommodative fiscal policy will be high if he does win, particularly given the recent deterioration in consumer confidence readings ( see chart).
The other major risk to Romania's longer-term fiscal health is that the EU becomes less of an influence on Romania's economic and political trajectory ( see our online service, August 24, 'EU Losing Influence In Emerging Europe'), thereby reducing the incentive to undergo painful structural reforms. Even before Ponta came to power President Traian Basescu had talked of pushing back Romania's date of accession to the eurozone, and we now believe that domestic antipathy towards further austerity means that Romania's adoption of the single currency will not happen this decade ( see 'No Euro Accession This Decade', July 27).
In addition to domestic resentment of EU/IMF-induced economic reforms, Romania has also shown that out of all the accession states it has one of the weakest frameworks for enforcing reform. Not only is it frequently cited as one of the worst performing regional economies in terms of ability to absorb EU structural funds, but recent fiscal data for 2012 shows that arrears have already started to increase at the local government level, according to the IMF, a sign that government oversight of local budgetary performance remains weak. Indeed, question marks over fiscal transparency were the reason behind the EU Commission withholding EUR3.5bn of funding in February this year, with the body citing 'irregularities' in the Regional Operations Programme for Human Development (POSDRU).
|Rhetoric Not Yet Leading To Higher Spending|
|Romania - Total Government Revenue, Expenditure and Net Lending/Borrowing, RONmn|
For now we believe that the desire to keep multilateral investment pouring in will see the government stick to its fiscal consolidation programme, although the likelihood of populist rhetoric from the Ponta administration ahead of the election is high. Beyond the election the outlook becomes less clear. For now we expect the nominal fiscal deficit to continue narrowing, but no return to surplus over the next decade. Should the government's rhetoric give way to looser fiscal policy, this will prove too optimistic.