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The Prolonged Political Crisis in Romania Endangers Fiscal Consolidation and Reform Agenda

By:
Levon Kameryan
Published: Oct 6, 2021, 14:33 UTC

The collapse of the Romanian government after less than a year in office increases the possibility of fiscal slippage and raises economic risks.

Romania

Tuesday, Romania’s Parliament voted in a no-confidence motion to bring down the minority government of Prime Minister Florin Cîțu of the National Liberal Party (PNL), after a period of tensions with Save Romania Union (USR), a centre-right party it established a coalition with late in 2020. This no-confidence motion of opposition Social Democrats and right-wing Alliance for the Union of Romanians (AUR) was supported by ex-coalition members of USR.

The collapse of the Romanian government increases political uncertainties, diminishing prospect for reform and fiscal consolidation.

An early election could be triggered if a new premier candidate is rejected

An early election could be triggered if Parliament rejects a new premier candidate twice consecutively. The largest group of the opposition, the Social Democrats, which promised to raise the minimum wage and increase pensions, has called for early elections in view of their recent gains in opinion polling. This, in turn, implies that rebuilding an earlier three-party coalition government, involving PNL, USR and Democratic Alliance of Hungarians in Romania (UDMR), may be the only feasible option for a majority government to avoid such snap elections.

Political stability vital to restoration of investor confidence

The reinstitution of political stability is vital for ensuring planned fiscal consolidation continues, important for restoring investor confidence as rising bond yields have taken their toll on primary market issuance. The lack of a governing majority could make it more difficult to pass important reforms, including those necessary for receiving critical EU funding.

Strong growth ought to provide an anchor for fiscal consolidation

Strong growth prospects of Romania ought to provide a relevant anchor for future fiscal consolidation. Scope expects growth of around 7% in 2021, revised up sharply from 4.8% under May 2021 forecasts, before 4.5-5% in 2022, buoyed by sizeable allocations of EU monies under the Recovery and Resilience Facility (of EUR 14.2bn in grants and EUR 14.9bn in loans, equivalent to 13.4% of 2020 GDP on aggregate).

The EU funding eases near-term liquidity bottlenecks as 13% of EU financing is expected to be immediately disbursed. However, in the absence of more profound fiscal reform, including significant enlargement of the tax base and higher tax compliance, the medium-run budgetary outlook remains unduly contingent upon sustained high rates of economic growth.

Fiscal consolidation and reform agendas remain key drivers of Romania’s credit ratings trajectory

We stress that the credibility of authorities’ fiscal consolidation and reform agendas is a key driver underpinning Romania’s credit ratings trajectory. Should Romania fail to form a stable coalition government near term that implements a credible fiscal and reform programme as envisioned under the recovery plan, this could undermine growth and public finance outlooks and result in a negative credit rating action from Scope Ratings. Our next review date of Romania’s ratings is scheduled for 22 October.

For a look at all of today’s economic events, check out our economic calendar.

Levon Kameryan is Senior Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.

About the Author

Levon Kameryancontributor

Levon graduated with a M.Sc. in International Economics and Public Policy from the University of Mainz in 2016. Levon worked previously as an economist at the Central Bank of Armenia.

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