Country Report Romania February 2009

Outlook for 2009-10

• The government comprising the Democratic Liberal Party (DLP) and the Social Democratic Party (SDP) has a large majority, which should enable the cabinet to pursue its agenda unimpeded by the parliamentary opposition.
• However, the potential for intra-government conflict is great, given likely differences between the DLP and the SDP over economic policy and judicial reform.
• The government's pursuit of fiscal retrenchment will bring it into opposition with the public-sector unions, and there is a significant risk of widespread social unrest as austerity bites and unemployment grows.
• The annual consolidated budget deficit is estimated at 4.8% of GDP in 2008, when government spending rose steeply because of the election, but will contract sharply in 2009-10 as policy is tightened.
• Following estimated real GDP growth of 7.7% in 2008, the effects of the global economic crisis and policy tightening will result in negative growth, of -1.8%, in 2009. A rebound to growth of 3.1% is forecast in 2010.
• Average consumer price inflation is forecast to fall gradually, from 7.8% in 2008 to 6% in 2009 and 4.1% in 2010.
• After reaching an estimated 12.6% of GDP in 2008, the current-account deficit is expected to contract sharply in 2009-10.

Monthly review

• Early disputes between the ruling parties over public-sector pay and the 2009 budget presage future strains in the coalition.
• The presidential election due in late 2009—for which the incumbent, Traian Basescu, has already begun campaigning unofficially—will pit him against an SDP candidate and lead to new rifts in the government.
• Adrain Nastase, a former prime minister and SDP leader, has been indicted on corruption charges and is to appear in court in late February.
• There is growing pressure on the government to seek financing from the EU, based on a new agreement with the IMF, although there is also resistance to seeking IMF support.
• Working-day-adjusted industrial output growth plunged by 17.5% year on year in December, illustrating the scale of the impact on Romania of the downturn in EU markets.
• The leu sank to a new low, of Lei4.3:€1, in January and February.