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All eyes on elections in Romania amid pension battle

CEE
By Oliver West
06 Oct 2020

Florin Cîțu, Romania’s finance minister, is in defiant mood as he speaks to GlobalMarkets from the campaign trail ahead of a busy election cycle. The previous day, September 22, parliament had voted to amend the budget to increase pensions by 40% — instead of the 14% increase that the National Liberal Party (PNL)-led government, which has a minority in parliament, had implemented.

With Romania rated Baa3/BBB-/BBB- and on negative outlook with all three major agencies, the higher increase — if implemented — would almost certainly push the country into sub-investment grade territory.

The PNL, which markets hope will win a majority at parliamentary elections in December, still has options to block the move, including the president returning the bill to parliament and challenging it at the constitutional court.

“The pension issue is non-negotiable,” says Cîțu. “A 40% increase is not going to happen, and this is our clear message to the market.

“I kept my word about increasing pensions: we did an increase of 14% that everyone has agreed is OK, and we will stick by this. We have the tools to stop the 40% increase from happening.”

Nonetheless, analysts are concerned. Extremely expansionary fiscal policy under the previous government — which was led by the same Social Democrat Party (PSD) that is pushing the 40% pension increase and has the largest share of seats in Romania’s hung parliament — has left the country running dual deficits.

Marek Drimal, EMEA strategist at Société Générale, says that the current account is approaching “dangerous levels”.

Moreover, “now that the parliament has approved a 40% pension increase, we think the risk of a downgrade has increased significantly”, he says, adding that the currency “also looks vulnerable”.

Dan Bucsa, chief economist for CEE at UniCredit, highlights that the move will bring challenges down the line.

“If pensions in Romania do increase by 40%, at first the country would probably have to issue more debt, but eventually it would have to reduce the deficit and increase taxation,” he says.

For now, rating agencies have not reacted, with some believing they are waiting for elections. But Fitch has warned that the 40% increase would lead to annual government spending rising by 4% of GDP.

Bank of America economist Mai Doan said in a September 21 note that “all hopes [were] on PNL”.

If the PNL wins, markets can expect a “liberal” economic policy, says Cîțu.

“We will act responsibly and put the economy on a path of fiscal consolidation,” says the minister “The pace will depend on the health of the economy, but we will show progress by next year.

“We want to show that things can be done differently in Romania: we can work together with the European Commission and investors, manage the economy in a proper way and show that we can be trusted.

“So far, I think we have regained trust; now we are looking to improve the rating, and will take the measures necessary.”
By Oliver West
06 Oct 2020