Wednesday, January 13, 2010

A Year in Review 2009: Romania

Oxford Business Group

For Romania, 2009 was a year of political and financial instability. The prospects in 2010 remain mixed, with few signs of an early return to growth.

Following a first-round presidential election in late November, which left no clear winner, incumbent Traian Basescu and the centre-left Social Democratic Party's (PSD) Mircea Geoana faced each other in a run-off ballot on December 6. In the lead up to the vote, both candidates made much of the economic situation, with Basescu accusing the opposition of stymieing much-needed reforms and Geoana blaming the president for the ills that have befallen the Romanian economy in the past year.

According to most indicators, the Romanian economy will have contracted by around 8% by the end of the year, though analysts predict there should be a rebound in 2010, with the economy having the potential to post modest gains.

Romania is now one of the EU's poorest states, having seen incomes and purchasing power slip in 2009 as the economy slowed down. Many of Romania's core sectors still face challenging conditions, despite some seasonal boosts, enjoyed by agriculture, which climbed by 15% in the third quarter compared to the second. However, this had more to do with the late summer months being the harvest season rather than any sustained rebound.

Demand for goods and services remains soft, with domestic consumption falling throughout the year, dropping by 11.8% in the third quarter, following on from a 12% decline the preceding term.

The financial sector has also come under pressure, with profits for Romania's banks expected to decline, according to Petre Bunescu, the deputy general manager of BRD-Groupe Société Générale, the country's second-largest bank.

On December 8, Bunescu told a financiers' conference that the net profit of the Romanian banking system would be $296m this year, down from the $1.7bn of 2008. Though earnings may have fallen back, strong deposit levels and access to lines of credit meant that Romania's banks would be in a solid position to contribute to the economic recovery expected in the new year, he said.

To some degree, that recovery is dependent on a return to political stability. The December 6 election saw Basescu elected by the slimmest of majorities, with the incumbent garnering 50.33% of the vote compared to Geoana's 49.66%. The result was not an overwhelming endorsement of Basescu, and the opposition made allegations of possible tampering and has called for an official probe.

In mid-October, the centre-right government of Prime Minister Emil Boc, the leader of the Democratic Liberal Party and an ally of Basescu, collapsed after failing to win a confidence vote in the parliament. Boc remains as premier in a caretaker capacity as efforts by the president to name a replacement prime minister who could command a workable majority in the house have so far not succeeded.

With Basescu apparently returned for another five years as head of state, he will either have to compromise in forming a more broad-based government in order to get legislation moving through the parliament again or call new elections – something he has shown a reluctance to do so far.

The political uncertainty had very real ramifications for the economy, with the IMF announcing in November that it was suspending a review of its $30bn standby agreement with Romania and delaying the release of the latest tranche of funds, worth $2.26bn, until such time as the reforms mandated by the lender are put in place. Among the conditions set by the IMF and supported by Basescu are a 10% cutback in the number of public servants, a freeze on wages for state employees, a reduction in the state budget deficit to 5.9% of GDP in 2010 and increased taxes on businesses.

Many of these measures have been opposed by Geoana and the PSD, and should Basescu struggle to find a prime minister acceptable to the parliament and who is willing to push ahead with the IMF's economic reform programme, the fund's assistance may be further delayed, meaning in turn that the expected recovery could be delayed.

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