Thursday, February 2, 2012

CEE MONEY-Romanian protests derail PM - and reforms

By Sam Cage

BUCHAREST, Feb 2 (Reuters) - Three weeks of anti-government protests have left Romanian Prime Minister Emil Boc chances of winning November's elections hanging by a thread.

They may also ensure the European Union's second poorest country remains exactly that for some time.

Boc's harsh salary cuts and sales tax hike have grabbed the headlines, but failure to push through lower profile overhauls of inefficient and bureaucratic services and government means the economy is still falling short of potential.

The World Economic Forum ranks Romania 77th of 142 countries for competitiveness, behind not only every EU member except Greece but also lagging Rwanda, Panama and Azerbaijan.

It is 72nd in the World Bank's Doing Business rankings, just behind Kyrgyzstan, and analysts say serious reforms are unlikely before the autumn parliamentary election despite pledges to the International Monetary Fund.

"Our economy is perhaps still the weakest in the EU," opposition USL leader Victor Ponta told Reuters. "We are the most fragile in front of the new storms that might come."

Thousands of Romanians have rallied across the country in the last month to demand the resignation of Boc and his ally, President Traian Basescu, saying they have had enough of austerity and perceived corruption among politicians.

The centrist Boc, whose support in opinion polls is below 20 percent, hopes the economy quickly builds on 2011 growth of 2.5 percent and voters' attitudes soften if he avoids unpopular reforms and uses some spare cash to increase wages and pensions.

In many ways Boc has done a remarkable job.

After the economy shrank by more than 8 percent and the budget gap ballooned, austerity saved Romania from spiralling borrowing costs that would have made its debt unsustainable.

He has also pushed through some reforms, including raising the retirement age and making it easier for employers to hire and fire, but he is now under pressure from his party to make concessions in areas like raising salaries.

His policies have helped bring the cost of issuing debt down to about 7 percent for five-year paper and the leu was the region's best performing currency last year.

But that stability is misleading. The leu is barely 1 percent off an all-time low and debt yields are higher than all other emerging EU countries except Hungary.

The bottom line is that 2 percent growth will not help a country whose per capita income is less than half the EU average to narrow the gap to western Europe or even its post-communist peers.

"We need to modernise institutions which we have not modernised, we haven't made them flexible. They are too costly, they are too bureaucratic," President Basescu said in a speech.

The leftist USL alliance has stuck together in opposition longer than many analysts expected and is now well placed to take power. It has committed to an IMF deal, but there are questions over whether it will make business and investing in Romania simpler.


Romania's post-communist governments have shied away from reforming or selling state companies, many of which drain rather than create wealth, because that would mean heavy job losses and alienate voters.

Boc's administration promised to privatise a host of firms - including energy groups Petrom, Transelectrica and Transgaz - and his track record on austerity suggested he could be the man to push changes through.

But while selloffs are still on Boc's agenda, progress is far behind schedule and last year's attempt to sell Petrom, the jewel in an albeit tarnished crown, flopped after the government refused to budge on a price that investors deemed too high.

At the end of 2009, state companies employed about 10 percent of Romania's workforce but contributed just 6 percent of GDP. They also owed over 2.5 percent of GDP in unpaid taxes at the end of 2010, according to the Fiscal Council, a watchdog for government policy.

It is difficult to invest because most companies in which the state holds a stake are unlisted and the Bucharest stock market is very illiquid, with less than 10 percent of the value of trading in Warsaw. Foreign investment plunged from $11.4 billion in 2006 to $3.5 billion in 2010.

"Using the stock exchange in the ongoing privatisation process will not only increase efficiency and profitability, but also the transparency and the level of corporate governance," said Grzegorz Konieczny, head of the $4.4 billion Fondul Proprietatea, created to compensate victims of communism.

Setting up a business takes a month, about twice as long as in other emerging EU countries, and most people hire a lawyer to deal with the reams of documents and offices, which drives away many who may otherwise be tempted by a 16 percent flat tax rate.

In the countryside, horse-drawn cart is still a common means of transport and though land is cheap and fertile, it can be so fragmented that an investor may need to negotiate with 100 different owners to secure enough for a commercially viable farm.

It would be simple to give small companies breathing space by making it easier to set up a company, pay taxes and reclaim value added tax, said Stuart Meikle, an agricultural investment adviser who has run a farming business in Romania.

But these reforms have not been implemented.

"Too many in the current Bucharest hierarchy are too far divorced from the nitty-gritty of life here. You just may hardly notice if you can afford the minions to do the work for you," Meikle said.

($1 = 3.3190 Romanian lei) (Additional reporting by Radu Marinas; Editing by John Stonestreet)

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