Romania Politics November 2021

Romania

Romania: Romania's new coalition government ends political crisis but raises concerns over fiscal consolidation

November 25, 2021

On 25 November, following two failed attempts, Nicolae Ciuca’s new coalition government won more than 70% of the vote in parliament, putting an end to nearly three months of political crisis after the fall of Florin Cî?u’s coalition government in early September. The new coalition is made up of the ruling center-right National Liberty Party (PNL) and the Hungarians’ Union (UDMR), both of which participated in the previous administration, as well as the center-left Social Democratic Party (PSD)—the largest force in parliament and previously the main opposition party. The entry of the PSD into government is a major development that is bound to influence economic decisions, notably fiscal policy, with control of several key ministries—including the ministry of finance, the ministry of the economy and the ministry of transport and infrastructure—being handed to the newcomers. Concerns have already been raised over the party’s poor track record in managing public finances, which could have implications for both the country’s credit rating and its access to EU recovery funds.

Above all, the new government’s focus will be addressing the country’s fourth and most severe Covid-19 outbreak, and it has pledged to vaccinate 10 million people within three months. Other goals include enhancing the sustainability of public finances through higher tax collection—principally by fighting evasion and reducing budget waste—increasing companies’ competitiveness via aid schemes, promoting Romanian exports to reduce the trade deficit, supporting agricultural production growth and improving road infrastructure. Although overall fiscal targets are largely unchanged—with the aim still to narrow the fiscal deficit to 3.0% of GDP by 2024—the new governing program for 2021–2024 envisages notable increases in social welfare spending: Among other things, measures include a hike in the minimum wage, an increase in pensions and contributions, and extending childcare allowances.

Analysts at the EIU highlight that although the new government is expected to bring some stability to Romania’s political scene, the PSD’s poor track record in terms of fiscal policy and the absence of a reformist party in the coalition will harm policy-making:

“The quality of policymaking will deteriorate. The previous PSD administrations were characterised by poor fiscal discipline, and Romania had already been placed under the EU's excessive-deficit procedure before the coronavirus pandemic. The new coalition has already agreed to […] an overall social welfare package that is expected to cost about 1.0% of GDP. Progress on administrative reforms and the fight against corruption will also stall under the new government. The presence of the reformist, anti-corruption USR in the previous government acted to some extent as a constraint on "pork barrel" spending and local clientelism. There will be fewer checks against such tendencies going forward.”

Mismanagement of public finances, as well as failure to adhere to the commitments made under the country’s national recovery and resilience plan—essential for unlocking financing under the EU recovery fund—poses a threat to growth and risks credit rating downgrades ahead. In early September, Fitch Ratings remarked that failure to follow the proposed deficit reduction path would be the main risk to its debt projections, while both Moody’s and S&P Global Ratings echoed Fitch’s concerns in their most recent decisions in October: Both agencies put strong emphasis on the government’s fiscal consolidation path, while also citing bright growth prospects, which are nonetheless dependent on the planned inflow of EU funds. With its recovery and resilience plan approved only in late September, Romania is still waiting to receive the first tranche of its allocated total. PSD officials have already mentioned renegotiating the terms of the plan, which could further delay disbursements of funds and potentially harm the country’s prospects.

Our panelists see a fiscal deficit of 5.8% of GDP in 2022 and 4.5% of GDP in 2023.


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