Is Romania the new Hungary? In other words, could it become the latest eastern European nation to rebel against tough austerity measures and lose its hard-won investor credibility – and perhaps even its IMF assistance – in return? Following the resignation of Prime Minister Emil Boc today, a number of analysts certainly seem to think so.
Boc’s resignation follows months of protests against the harsh austerity measures that his government has implemented in return for continued IMF assistance, and has ignited concerns that his successor may bow to populist pressure and seek to renegotiate the terms of the agreement with the Fund, or rip it up altogether.
To recap: Romania received a €20 billion loan from the IMF in 2009 which enabled it to prevent a run on the currency, maintain investor confidence and prevent an escalation of government borrowing costs. Boc’s government was forced to commit to further deficit reduction measures in return, including a 25% sector pay cut and a freeze on pension increases.
This austerity drive has helped to reduce the current account deficit from 13.5% of GDP to less than 5%, as well as more than halving the fiscal deficit since 2008 and stabilizing public debt. But the reduction in living standards has angered many Romanians, and had seen Boc’s approval ratings fall to below 20%. Thousands of protestors braved sub-zero temperatures to take to the streets of Bucharest last month, and further protests had been planned for the coming weeks.
In his resignation statement, Boc appeared to suggest that by resigning, he hoped to ease popular discontent, prevent further protests and to protect the country’s credibility with investors and the IMF. "I took this decision to release the tension in the country's political and social situation, but also in order not to lose what Romanians have won," he said in a televised speech this morning.
The IMF – which, coincidentally or otherwise, has just completed its latest review of Romania’s economic programme, concluding that the Boc administration had made “good progress” in a “very difficult external environment” – has been quick to stress that Boc’s resignation in and of itself has not changed its views on the country’s outlook, and therefore its eligibility for further assistance.
"I see no reason necessarily for this to have a material effect on the aid agreement. We have every expectation the agreement will continue," Jeffrey Franks, the IMF’s mission chief in Bucharest, told Reutersfollowing Boc’s resignation.
Well, what else would you have expected Franks to have said?
Currency investors certainly seemed to take the announcement in their stride: the leu remained almost flat on Monday afternoon, following Boc’s announcement.
But with the identity of his successor – and the date of possible elections – all up in the air, and with popular clamour growing for a relaxation of the government’s austerity programme, a number of regional analysts are nevertheless worried about what the future may hold.
Here’s ING’s Simon Quiano-Evans:
| Today’s move by the PM should be seen more as a sign of desperation, given the strong pressure on the government to cede to protests over the last few weeks, versus the stark position of the EU/IMF on issues such as public sector wages and pensions. Indeed, the political backdrop risks pushing the country back into the uncertainty of a few years ago, where political parties failed to reach a consensus agreement to put the country back on a growth path, in turn leaving the sovereign ratings open to downgrades – a clear risk for a cut in the outlook. |
And Capital Economics’ William Jackson:
| That there is austerity fatigue in Romania is unsurprising. Since accepting an IMF stand-by arrangement in 2009, the government has pursued a number of painful measures, including a VAT hike, a 25% public sector pay cut and a freeze on pension increases. Today’s news raises question marks about whether there is political appetite for further austerity and therefore if Romania can count on further IMF help. |
Some are speculating that Boc’s resignation could be a calculated gamble to enable him to appear to be conceding to protestor demands, in the hope that opposition forces remain too divided, or too reluctant to push for early elections as they will not want to be tarred with the austerity brush either, and that he may return to office.
But even if a new government is elected in the coming months, others remain optimistic that Romania can avoid a Hungary-style financial implosion and all-out confrontation with its external creditors.
According to Nomura’s prolific EM analyst Peter Attard Montalto:
| The IMF has said it is confident any new government would stick to the existing [precautionary stand-by] agreement, and we think this will be true for the current interim administration. We believe a new government would seek to renegotiate the agreement to at least slow its provision. However, the opposition knows the precarious position the country is in with regard to both funding and its banking system (given deleveraging externally). We therefore expect more subtle shifts and changes of direction than Hungary-style ripping up of IMF agreements and dispensing with a backstop. We expect the P-SBA to last under a new government but to be renegotiated. |
Furthermore, as Commerzbank’s Tatha Ghose points out, a change of government may not necessarily result in a substantial change of policy given that many of the cost-cutting measures have already been implemented or committed to and would therefore be extremely difficult to reverse:
| Given the strict IMF/EC guidelines which Romanian policy and Budgets are following, the actual course of policy depends less on who actually runs the government. Indeed, this is one reason the Opposition has not been too hasty to grab power itself (even now, the Opposition will possibly support some kind of technocrat government to carry on with reforms until new elections are fought). This relative neutrality of policy to precise government composition has kept sentiment stable following the resignation announcement today; the leu has hardly moved. |
But while the immediate political risks at home may not be as large as they seem, the external risk environment in Europe remains heightened. In this light, any form of political uncertainty could be extremely damaging for Romania’s credit rating and borrowing costs.
Here’s Capital Economics’ Jackson again:
| Romania’s IMF backstop allowed it to escape from financial market turbulence over the past few months relatively unscathed. The comparison with the plight of Hungary is instructive in this regard. Romania suffers many of the same vulnerabilities as Hungary – fragile banks reliant on euro-zone parents for funding and high external debt levels (although not quite on the same scale as Hungary). But whereas Hungary, which broke off talks with the IMF in 2010, suffered a rout in its bond and currency markets earlier this year, Romania has so far managed to stay under the radar. [But] the Romanian economy is highly exposed via financial and trade linkages to the single currency zone, particularly the periphery... Without a speedy resolution to the current political situation and clear signs that the government is committed to further reforms, Romania’s isolation from turmoil elsewhere in the region would prove to be fleeting. |
In other words, Romania could soon punished by markets for its economic and political funk. But a broader point remains: bears feared that the post-Lehman environment would trigger a political meltdown in the region as debt-burdened businesses and households took a knock, and western European demand for the region’s exports crumpled. Although a clutch of governments fell and protests kicked in, in general, many countries bit the fiscal bullet - before the darkening eurozone backdrop, that is - and economies stabilised somewhat. It's now round two.