December 15, 2011 5:08 pm by David Keohane
Romania joined a growing pool of countries on Thursday when its parliament passed a swingeing budget which aims to more than halve its budget deficit, from 4.4 per cent of GDP in 2011 to 1.9 per cent in 2012. But those figures depend on a growth rate of over 2 per cent next year – an optimistic assumption for an economy with such close ties to the stumbling eurozone.
Romania is undertaking its austerity, in part, to placate its paymasters in the International Monetary Fund and the European Union from which it has a precautionary $5bn credit line in place. Romania’s parliament passed the budget by a vote of 239 to 168 and Emil Boc, Romania’s prime minister said, after the vote:
Today’s vote pushes through Parliament a budget that consolidates Romania’s financial position and that doesn’t have any electoral hints ahead of the general election next year.
Romania is Europe’s second poorest economy and no stranger to austerity having already completed a €20bn aid programme earlier this year. Romania’s deficit has narrowed to less than 5 per cent of GDP from almost 14 per cent three years ago when Lehman Brothers collapsed.
However, officials have said the possibility of expanding the deficit, up to a ceiling of 2.5 per cent of GDP, remains open if economic conditions worsen. This newest round of savings will be achieved through public sector wage and job cuts, pension freezes, the sale of some state-owned companies and the rejuvenation of others.
According to Bloomberg, Romania is planning to cut the number of its public jobs to 1.1m by the end of next year from 1.4m in 2010. The government has already eliminated 180,000 jobs, according to Traian Basescu, Romania’s president.
Romania’s economy is expected to expand by close to 1.8 per cent in 2011 and the budget has pencilled in economic growth of 2.1 per cent for 2012. That is less than the previous forecast of 3.5 per cent but might still prove over ambitious says Neil Shearing of Capital Economics – who forecasts a “small contraction, of near 0.5 per cent, predicated on a deep recession in the eurozone.” Not a particularly extreme scenario.
“Further austerity, will only add to the headwinds”, facing Romania’s economy, says Shearing and if the eurozone hits the rocks hard, “Romania’s domestic economy will not be in a position to drive growth.”
Romania’s economy is suffering from is proximity to the eurozone. It sends half of its exports (which make up 30 per cent of GDP) to the eurozone, according to Capital’s figures, and its banks are also massively beholden to Greek and Austrian parents. According to Fitch Ratings, Greek banks own 15.8 per cent of Romania’s bank assets while Austrian parents own 31.5 per cent.
Romania’s markets have reacted well since the budget announcement with the country’s headline Bucharest BE index closing up 1.1 per cent. The Romanian leu was up 0.1 per cent against the euro in late afternoon trading.
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