Political noise weakens sound fundamentals
Overview:
November parliamentary elections were extremely close and most likely will yield a PD-L/PNL government. However, political noise is likely to remain high whatever the outcome of the government formation process. A tendency to populism that results from these political tensions tends to detract from otherwise sound economic fundamentals. The economy has been growing quickly. Investment growth and net FDI inflows are strong and have started to yield a stronger export base. However, the current account deficit is large and underlying inflationary pressures have risen as a result of irresponsible fiscal and incomes policies. Policies must be strengthened to reduce the current account deficit and reduce reliance on short-term external debt as well as to give monetary policy more support in reducing inflation.
Recommendations:
The two largest parties both committed during the election campaign to an unsustainable combination of higher spending and lower taxes. Romania has already been down-graded and left on negative watch by two credit rating agencies1 as the proportion of short-term external debt to FX reserves rises. A new IMF agreement (even on a precautionary basis) would have been a signal that fiscal policies might become more responsible. Failing this, the central bank (NBR) is fighting inflation single-handedly. We are underweight on Romania external debt.