Romania Defence and Security Report Q3 2009

We have lowered Romania's short-term political risk rating to 58.3 to reflect the elevated risk to policy formation and government stability as the country heads into recession in 2009. We believe rising unemployment, alongside expected reductions in government spending, will significantly increase the risk of strikes, protests and public unrest this year.

A significant rise in joblessness throughout the country is expected, as domestic and external demand falters, combined with a concurrent deterioration in real living standards. Indeed, the unemployment rate jumped to 5.3% in February, up from 4.9% in December - the highest level recorded by the National Employment Agency since March 2007. We anticipate that there will be further rises in the unemployment rate, and our end-2009 forecast has been revised up to 8.6% accordingly.

The Romanian parliamentary elections last November led to the formation of an uneasy coalition government, comprising the Democrat Liberal Party (PD-L), with 166 seats, and the Social Democrat party (PSD), with 163 seats. Emil Boc of the PD-L is Prime Minister, with the PSD's Dan Nica his deputy. The government's first months have been turbulent. There have already been three different interior ministers.

We believe the Democrat Liberal-led government is the most attractive option for ensuring Romania's long-term political stability and economic growth. The party campaigned on implementing the anticorruption reforms that were advocated by the EU. It is also the most committed to pushing ahead with Romania's convergence to EU norms. The PD-L-led government is expected to change the style of Romanian politics, so as to substantially reduce the friction between the legislature and the executive. In turn, this is likely to speed up reforms and lead to a more harmonised approach to policy making.

In late February, the government passed a budget focusing on public works spending to cushion the economy from the global financial crisis, and it is pursuing aid options from the EU and IMF.

Our forecast is for real GDP to contract by 3.2% this year, as external demand for Romanian goods falls, capital inflows slow and consumer and business confidence weakens, weighing on domestic consumption. In line with our regional view, we expect the outlook for Romanian economic activity to begin to improve in 2010, but growth is projected to recover only to an average 4.2% between 2011 and 2013.

In recent weeks, the government has stepped up efforts to tackle the country's extensive corruption. We believe that these measures will be viewed positively by the EC, which has previously strongly criticised the Romanian government's hitherto poor efforts in this area. While successful policy implementation by the government is essential, the effects of these policies may take some time to filter down through society.

The Romanian defence industry is expected to continue its transition from a centrally planned to a market-based industry, with its restructuring and privatisation programme. There have been dramatic redundancies in the recent past, including the loss of 61% of the workforce between 2002 and 2003. A further reduction in employment within the Romanian defence industry is expected, levelling off over time.

This quarter, we have introduced a significant new aspect to BMI's Defence reports - the City Terrorism Rating (CTR), which assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question and incorporates the 'prevalence' of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the 'threat' of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns.