The Romanian leu rallied after the victory of the Social-Liberal Union (USL), which secured two thirds of seats in the new parliament. The currency is up 0.3 per cent against the euro, while yields on Romanian government euro-denominated bonds dropped two basis points to 4.58 per cent, according to Bloomberg.
The reaction shows relief that the USL, headed by Prime Minister Victor Ponta, has a clear mandate for a new standby agreement with the IMF and EU. Romania’s current deal, worth €5bn, expires at the end of March. A new arrangement would underpin investor confidence.
Before the election, many feared a less clear-cut result would lead to political turmoil. Had the USL won less than half the seats in parliament, President Traian Basescu, a Ponta rival close to the opposition, might have formed a government including populists and excluding the USL.
Ponta is not home and dry yet. Basescu could refuseto reappoint him prime minister, forcing a showdown, but this seems unlikely given the scale of the USL’s victory. Dan Tapalaga, a Romanian journalist and commentator, says there are signs that the broad-church URL is turning on itself, with Ponta keen to bring in a party representing Romania’s Hungarian minority to dilute the influence of his hardline partners.
“Markets are more confident of the relationship between a new government and the IMF,” Luis Costa, senior emerging-market strategist at Citigroup told Bloomberg. “That means less foreign-exchange debt refinancing pressure, thus improving the outlook on the leu.”
Indeed, investors will be hoping for a smooth transition and that the USL does not use its victory as an excuse to resume its attacks to Basescu and others.
The USL owes its success partly to popular opposition to austerity measures imposed by previous, pro-Basescu governments, including a 25 per cent cut in public sector wages. Those measures helped spark street protests at the beginning of the year and the fall of two Basescu-backed governments.
The last administration – toppled in a vote of confidence in April – tightened so much it overshot IMF targets, allowing Ponta to ease off. And even if his victory is a vote against austerity, he is note expected to change tack. More challenging will be pushing through the reforms that the IMF is likely to recommend – particularly sell-offs of large state enterprises such as airline Tarom, rail freight company CFR Marfa and chemicals outfit Oltchim.
Romania’s GDP is expected to grow 1 per cent this year and 2.5 per cent in 2013, according to the IMF – a respectable performance under the circumstances. The USL has a mandate to push forward an agenda to generate real income growth and tackle issues brushed aside during the boom of the last decade. Whether it will take its chance, rather than indulging in more political wrangling, remains to be seen.
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