Monday, December 3, 2012

Revolving Romanian Cabinets Spook Investors as Cash Flees

By Andra Timu & Irina Savu - Dec 3, 2012

Romania needs its Dec. 9 election to end a political war that has split the nation’s leaders or face a slide in the currency, bonds and investments, said executives and analysts from Bucharest to London.

The former communist country, with more prime ministers since 1990 than any other European Union member, has been ruled by three Cabinets this year, stalling plans to strengthen the economy and the judiciary. Foreign direct investment plunged to 1.1 billion euros ($1.4 billion) in the first nine months from a record 9.5 billion euros in 2008 and the leu is hovering near an all-time low.

“We need a government that achieves the things it promises to deliver,” said Steven van Groningen, the head of Raiffeisen Bank International AG (RBI)’s Romanian unit. “The lack of predictability is the most important factor that negatively influences the business climate.”

President Traian Basescu and Prime Minister Victor Ponta are caught up in a power struggle that led to a government collapse in March and a failed impeachment vote against Basescu. The conflict prompted German Chancellor Angela Merkel to voice concerns the EU’s second-poorest member behind neighboring Bulgaria is backsliding on democracy as it seeks further aid from the EU and the International Monetary Fund.
Investor Confidence

Investor confidence has waned, boosting borrowing costs and pushing the leu to a record-low 4.6520 against the euro on Aug. 3. The volatility prompted the central bank to halt a series of interest-rate cuts designed to boost economic growth.

The cost of insuring Romanian debt against non-payment for five years using credit-default swaps rose to 228 points from 206 points on Oct. 17, the lowest in at least two years, according to data compiled by Bloomberg.

“I don’t think the ruling coalition is aware of the dangers it is facing,” said Michael Taylor, a senior analyst at Oxford Analytica in the U.K. “This affects foreign investments as companies become very suspicious about being in a country where they don’t know what to expect.”

Skepticism about the government’s ability to deliver on promises exacerbates concern about a faltering economy. Gross domestic product contracted a seasonally adjusted 0.5 percent in the third quarter, erasing a 0.5 percent gain in the previous three months.

The country of about 19 million, the second largest in the EU’s east, has slipped to 72nd of 183 nations in the World Bank’s 2012 Ease of Doing Business survey, below neighboring Bulgaria and Hungary.
Political Strife

Ponta’s ruling coalition, known as the Social Liberal Union, is set to win 57.4 percent of the vote, according to the polling company IMAS. The survey of 1,039 people between Oct. 10 and Oct. 18 put parties aligned with Basescu at 16 percent. The margin of error was 3 percentage points.

“The fact that this electoral year will be over soon is good news in itself as, hopefully, politicians will leave aside the political strife and will address key priorities,” Mark Mobius, who manages $50 billion in emerging-market debt at Templeton Asset Management, said by e-mail. “Regardless of the government’s composition after the vote, we expect it to ensure stability and predictability for the business environment.”

The prospect of a decisive win giving Ponta enough parliamentary backing to execute his agenda may help win investor confidence, said Gyula Toth, who helps manage 400 million euros at Ithuba Capital in Vienna.

“The expectation is that the current government will win the election and that they’ll reach an agreement with the IMF shortly afterwards, maybe even in the first quarter,” said Toth. “If there’s a change to this scenario it may have a negative.”
EU Bailout

Ponta and Basescu agree that Romania needs to reach a deal with the IMF and the EU next year, once the current 5 billion- euro precautionary agreement, signed in 2011, ends. The nation hasn’t drawn any money from the facility. Romania also obtained a 20 billion-euro bailout from the IMF and the EU in 2009.

The next government must also upgrade infrastructure, develop capital markets and improve legislation, according to Mobius and Mariana Gheorghe, who heads OMV Petrom SA (SNP), Romania’s biggest oil company and the largest contributor to the state budget.

Romania’s infrastructure is among the shoddiest in the EU, according to the World Bank. The country with an area almost the size of U.K. has three highways with a combined length of less than 500 kilometers (310 miles).
‘Perfect Location’

Companies such as German tiremaker Continental AG (CON) need improved transport systems to help distribution and shipping to neighboring countries such as Hungary.

“In one year, it will be the perfect location for me to make plans and grow, because we are near the raw materials and key routes for exporting our tires,” said Pedro Carreira, the head of Continental’s factory in the city of Timisoara, less than an hour from neighboring Hungary.

If it wins, the ruling coalition plans to pass measures to stimulate the economy and may consider some tax cuts and wage increases, according to its program. The opposition alliance has promised to cut a 16 percent flat tax and lower some social contributions.

After so many promises and so little action in the past, Raiffeisen’s van Groningen says he’ll wait to see if politicians will turn their attention to the economy instead of each other.

“The proposals are just words,” he said. “What we need is to increase the capacity of the administration to deliver.”

To contact the reporters on this story: Andra Timu in Bucharest at; Irina Savu in Bucharest at

To contact the editor responsible for this story: James M. Gomez at

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