As prospect of IMF deal fades, Romania risks backsliding on deficit, reforms

Reuters News
|
Posted: Oct 23, 2015 6:14 AM

By Matthias Williams and Radu-Sorin Marinas

BUCHAREST (Reuters) - The prospects of Romania lining up a new aid deal led by the International Monetary Fund are dimming, and the country risks backsliding on commitments to run tight budget deficits and implement structural reforms.

Under fire for corruption and facing an election in 2016, Prime Minister Victor Ponta's Social Democrats may lack the stomach to rein in spending or implement measures such as overhauling loss-making state industries as part of a new deal.

The IMF has also balked at the government's moves to slash taxes and raise the wages of some public sector workers by up to a quarter, stressing this week that Romania should safeguard its recent economic progress.

As a result, the country could find itself without an agreement for the first time since 2009, when the IMF, the European Commission and the World Bank rescued the eastern European country from financial crisis.

"It's encouraging that there's growing recognition among policymakers that an IMF deal is beneficial for Romania," said William Jackson, a senior economist at Capital Economics. "It would help to shore up confidence in Romania in the event of any external shock and, perhaps most importantly, it acts as an anchor for structural reforms."

"That said, I'm not sure that an agreement will be reached," he said.

The economy is performing better and "with an election coming up, it's difficult to see the government making the compromises that would probably be needed to secure an agreement with the IMF," he said.

The latest deal expired in September. Ponta has said he wants a new agreement that would provide Romania with a flexible credit line, and the IMF has said it's ready for discussions if Romania makes a formal request.

The finance minister told reporters on Thursday that the government may ask for a new deal in March but that signing the agreement might have to wait until after the election. He stressed he was speaking in a personal capacity.

The IMF and Ponta's office declined to comment.

"So far, we haven't discussed with the Romanian authorities about a new program," Angela Filote, the Commission's Head of Representation in Bucharest, told Reuters by mail.

VERY COMPLICATED

Recent history suggests new talks may be tough. Romania's reluctance to implement measures such as raising gas prices or overhauling the coal sector meant no deal review was successfully completed after mid-2014.

The leu, up more than 1 percent against the euro this year, fell after an IMF statement on Thursday, as it did in February when Bucharest's discussions with creditors stumbled over energy policy disagreements.

"As the executive is embarking on a fiscal widening path ahead of next year's elections, the lack of an IMF agreement is set to negatively impact RON (leu) assets," ING said in a note.

The ruling party suffered an embarrassing defeat in last year's presidential election and Ponta faces trial after being indicted on corruption charges related to his time as a lawyer, and so is even less likely to risk angering voters with reforms.

A poll by INSCOP Research and Adevarul, carried out at the height of the Greek debt crisis in July, suggested 48.9 percent of Romanians think they should make sacrifices to pay the country's debts in time. But 40.2 percent did not.

Another survey by the same pollster showed 33.9 percent of Romanians trust the IMF, the lowest of all international institutions in the poll. NATO came top with 57.6 percent.

"Things are going to be very complicated on the negotiating side if the IMF and international creditors come up with tough conditions," a senator from the Social Democrats told Reuters. "But we can hope to eventually reach an agreement."

Ponta may also be wary of the fate of the man who enforced painful job and wage cuts and tax hikes under the first IMF deal. Former premier Emil Boc, who became the face of such measures, resigned in 2012 helping pave the way for Ponta's ascent.

"The busy elections calendar for 2016, when both local and general elections will be held, is not conducive to implementation of unpopular reforms," said Otilia Dhand of Teneo Intelligence. "As a result, the Fund would likely be skeptical towards Romania's request for another program."

To be sure, Romania's finances are in better shape than six years ago. The government is targeting a budget deficit of 1.86 percent this year, compared to 7.3 percent in 2009. Economic growth is headed for more than 3 percent versus -7.1 percent.

Paradoxically, Romania's healthier economic position weakens the case for another deal. The previous agreement backstopped the government with a 4 billion euro precautionary credit line which was never tapped.

"The IMF program has been off-track for quite a while and I don't think they are going for another one. They have serious disagreements on the fiscals," said Viktor Szabo, a portfolio manager at Aberdeen Asset Management.

"The government is still looking at avoiding the EDP (Excessive Deficit Procedure) of the European Union, but I don't think they are willing to follow the IMF program. It's bad, but at this time they are strong enough to go without an IMF program."

Without the straitjacket of a new deal, Romania could end up putting its own progress at risk once again. The IMF has warned that the tax cuts and wage hikes will push the deficit to close to 3 percent in 2016 and above that threshold in 2017.

"We could wonder how serious the government is about wanting a new deal considering we didn't show a marked desire to enforce structural reforms under the current package," said Ionut Dumitru, the head of Romania's fiscal watchdog.

"What is certain is that over the last 25 years, during the times we haven't had IMF deals, we made the biggest economic policy mistakes."

(Additional reporting by Luiza Ilie in BUCHAREST and Karin Strohecker and Sujata Rao in LONDON)