Friday, August 19, 2011

CEE MONEY-Pre-poll nerves for Romania govt if new austerity wave

By Radu Marinas and Sam Cage

BUCHAREST, Aug 16 (Reuters) - Romanian Prime Minister Emil Boc has been a model student of IMF-prescribed austerity, but global market turmoil, weak growth and stalled privatisations could force him to cut deeper and hurt his 2012 electoral prospects.

Boc has already suffered heavily in opinion polls, with the parties of his centre-right ruling coalition garnering only 25 percent support, versus a comfortable 60 percent for a loose alliance of opposition parties led by leftist Social Democrats.

Many political analysts, however, have said Boc's close ties to President Traian Basescu, a solid reform record, and the weak links among the opposition parties could allow him to hold onto power even if he does not win next year's general poll outright.

Under his stewardship, the Balkan state of 22 million has returned to economic growth after an 8.3 percent contraction over two years and is on its way to stabilising its budget under a 5 billion euro, International Monetary Fund-led loan package.

Boc froze pensions, cut public sector salaries by a quarter and raised national sales tax by 5 percentage points. He was on track to cut the budget deficit to below the European Union's prescribed ceiling of 3 percent of annual output next year.

But that hit a speedbump in June, when the deficit jumped 50 percent from the previous month to 2.1 percent of gross domestic product, putting this year's target of 4.4 percent at risk.

Missing the target could prompt the IMF to push for a new round of austerity measures in the EU's second-poorest state, ahead of municipal elections next summer and the general election later in the year.

"If the global economy is heading to a slowdown they will need to further cut public spending to offset a potential revenue decline," said Georgiana Constantinescu, analyst at Credit Europe Bank in Bucharest.

"I do believe they will try to meet the deficit target, but they might need to enforce cost-cutting measures, including layoffs, and further pursue the restructuring of loss-making state firms."


June's deficit jump was worrying because Romania's fiscal gap usually expands at a much faster rate as the year draws to a close.

More headwinds are building. Market turmoil and the euro zone slowdown mean growth will probably miss the centre-right government's 1.5 percent forecast for this year, which will in turn hit budget revenues.

Boc said as much this week when he said second quarter growth data "may not look as good as we originally expected" following a 2.2 percent fall in June industrial output.

Data published on Tuesday showed Romania's economic growth slowing down to 1.4 percent on the year in the second quarter after 1.7 percent growth in January-March.

Another plan to raise cash by selling off state firms also hit a snag in July when the $840 million sale of oil and gas group Petrom collapsed .

With markets now sliding across the world, analysts say it is unlikely that this year's other plans to raise about $1 billion in privatisations will go ahead, even as the government's need for the cash increases.

Daniel Hewitt at Barclays Capital says he sees downside risks to his growth forecast of 1 percent this year and estimates the budget gap could hit 5.0 percent of GDP.

And although it has given Bucharest wiggle room in the past, the IMF will probably prefer that Boc buckle down next year instead of risking the type of vote-boosting spending spike that has accompanied many elections across the region.

"It looks like things are going badly on growth," said Hewitt. "I think the IMF would be making a huge mistake to put everything on 2012."


The three opposition parties have a loose alliance, but analysts say there is little chance that they will maintain their cooperation and win the election as a coherent force.

Boc's advantage lies with President Traian Basescu, who will appoint the next prime minister in late 2012. Despite his largely ceremonial official role, he wields broad influence over Boc's Democrat-Liberals and the country.

That means that unless the opposition can achieve an outright majority in parliament next year Basescu is almost certain to use his power to reappoint Boc.

But new cuts, such as accelerated layoffs in the public sector, will hurt Boc, especially since his government has already axed about 200,000 posts since 2009 and plans another 200,000 cuts by 2015.

"Now people see that there's no milk and honey in Romania so it's clear the government would not be able to recoup its lost ground," said independent political analyst Bogdan Teodorescu.

By comparison, the leftists have made it clear that fresh cost-cutting is not an option and they would probably not engage in a new deal with the IMF -- a stance that will keep markets on edge ahead of the vote. ($1 = 3.009 Romanian Lei) (Editing by Michael Winfrey and Stephen Nisbet)

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