Wednesday, May 9, 2012

FT: Romania: can Ponta stay the course?

May 8, 2012 12:13 pm by Stefan Wagstyl

Investors have welcomed the rapid confirmation of Romania’s new government, with the leu recovering the ground it lost after the last administration resigned less than two weeks ago.

But there’s something slightly suspicious about the ease with which prime minister Victor Ponta’s coalition has won parliamentary approval for running Romania until November’s elections. Will he really stick to the IMF-backed austerity programme, when austerity is coming under attack elsewhere in the European Union? Will his MPs stay the course as electoral reckoning approaches? Will the parliamentary turkeys really vote for Christmas?

Ponta (pictured) takes over from a government that lasted just two months. Mihai Razvan Ungureanu’s centre-right administration collapsed in the face of public protests about tax increases and spending cuts that also felled his predecessor, Emil Boc.

“Today will mark a fundamental change in Romania’s fate. I am the only prime minister that celebrated his adulthood after the 1989 revolution,” the 39-year-old Ponta said in a speech to parliament, housed in a huge marble palace built by communist dictator Nicolae Ceausescu and finished after he was toppled and executed.

The former rally champion is rightly taking heart from the scale of his majority after winning 284 votes in the 460-seat assembly in Monday’s vote. According to Bloomberg, he told reporters: “This stable majority is a good thing for us, after the very fragile majorities of the last two governments.”

But his Social Liberal Union (USL) controls just 232 seats and is itself a coalition. The remaining support comes from a fragile string of small parties of both the left and right and fickle ethnic minority representatives that tend to back whoever is in power.

Ponta’s team has vowed to stick to a €5bn pact with the International Monetary Fund and the European Union to cut Romania’s budget deficit to under 3 per cent of gross domestic product in 2012, from 5.2 per cent last year.

“We have managed from our position of an impromptu government to negotiate a letter of intent with international institutions that gives a message of stability,” Ponta said.

But Ponta also says he has IMF agreement for an 8 per cent increase in public sector wages in June – partly restoring the 25 per cent reduction imposed in 2010 – and to return to pensioners some overpayments of social security contributions.

At Tuesday’s government meeting Ponta’s administration was due to approve a letter of intent to the IMF/EU confirming its support for the loan agreement.

Investors seem ready to allow for some flexibility, as long as the overall IMF/EU deal stays in place. The leu plunged to a record low of 4.462 to the euro on May 1 after the Ungureanu government collapsed. But has since recovered and was trading at 4.40 on Tuesday.

As Capital Economics said in a note last week, Romania needs economic room for manoeuvre:

For our part, we don’t think moderate fiscal slippage is necessarily a bad thing. It looks like weak external demand may have pushed the economy into recession in Q1, while [recent] disappointing European PMI data suggest that Q2 could be even worse.

But can the government stick to even the more generous line that it is proposing in the light of the domestic pressures – and the arguments about austerity now raging elsewhere in Europe?

Romania’s recent administrations have proved short-lived. But they have been from the centre-right. Ponta comes from the left and so will want to draw a clear line between himself and his predecessors.

More importantly, perhaps, the country has stuck to its IMF-backed programmes for three years now – a good record given the deep recession it endured in 2009-10 and the weakness of the subsequent recovery.

Also, investors have a lot of faith in the central bank, which has, through intervention, kept the currency pretty stable. This year, the leu has traded within a 4 per cent range against the euro, compared with a range of around 13 per cent for the Hungarian forint.

As Société Générale said on Tuesday: “The stabilisation of the political situation (at least for the coming few months) and the central bank’s action in the FX market should help ease pressure on the RON.”

A lot may now depend on Greece, where Romania’s trade and banking ties are stronger than any other Balkan country’s. Even with the best intentions, Ponta may struggle to contain the impact if Greece implodes. It could be a long, hot, sweaty summer in Bucharest as well as Athens.

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