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Romania Politics October 2019

Romania: Political uncertainty intensifies on ousting of Social Democrat government

Ludovic Orban, head of the National Liberal party (PNL), appears set to be Romania’s next prime minister if he wins a vote of confidence on 4 November. Orban was appointed as prime minister-designate by President Klaus Iohannis on 15 October, after a no-confidence vote speared by the PNL toppled the Social Democrat (SD) government led by former Prime Minister Viorica Dancila. If confirmed, Orban would be the fourth prime minister in less than three years. Regardless of the outcome, persistent political uncertainty and gridlock will likely weigh on the economy ahead, stalling needed fiscal reforms amid heightened macroeconomic imbalances.

Going forward, the most likely scenario is that Orban will lead an interim minority government until the next general election due for late 2020 or early 2021. While earlier parliamentary elections remain a possibility, the timing of November’s presidential vote means that next year is the earliest a snap election will realistically take place. The turbulent political scene will likely make it difficult to pass meaningful legislation and, if Orban’s government is confirmed, it would likely struggle to gain support for bold measures. Trimming ballooning and unsustainable fiscal spending and approving the 2020 budget remain the most pressing challenges for the new premier amid a deteriorating fiscal backdrop: The general government deficit jumped above 2.1% of GDP in January–August, from less than 1.8% of GDP a month prior, and is likely to deteriorate further according to our analysts, especially amid the planned rise in public expenditure brought upon by the new pension law.

With regards to the country’s fiscal challenges, analysts at JPMorgan noted:

“Romania’s fiscal position is concerning even in the absence of the pension law which could lead to unsustainable fiscal deficits. […] If current spending is maintained (including those approved in the pension law), the budget deficit is likely to exceed 8% of GDP in 2022. Thus, the authorities would have to prevent pensions rise by 40% in September next year and to introduce tightening worth 0.7% of GDP next year. The pension hike can be reversed before its implementation, but it is most likely irreversible afterwards due to previous Constitutional Court ruling.”

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