With the government led by Emil Boc having stepped down at the beginning of last week and the pressure of forthcoming elections mounting, Romania needs to pay a lot of attention to the election years 2012 and 2013. Specialists told Business Review the main challenges that the country could face this year and what effects the election years could have on the local economy.
A turbulent context
After weeks of political turmoil and social unrest, Romanian Prime Minister Emil Boc announced at the beginning of last week that he was stepping down.“I have resigned because I don’t cling to power – for me it does not much matter if I keep the position for a few more months until the elections in November. I took the decision to give up the government’s mandate in order to defuse the political and social tension in Romania and for Romanians not to lose what they have gained: the country’s economic stability,” Boc said in a speech after a government meeting.
The outgoing PM added that his government had had to take tough and unpopular austerity measures, not because he wanted to do so but because there was no other choice. “Romanians were the only ones that truly saved the country. Politicians only did their duty, Romanians saved the country from chaos,” said Boc. He said that it was now politicians’ responsibility to appoint a new government as quickly as possible.
As PM, Boc survived ten motions of censure, including one adopted by Parliament before the presidential elections in November 2009. He managed to keep his post despite many attacks against him during 2010 and 2011, including some from big names within his own party. He also hung on to the position when Romanian President Traian Basescu spoke last year of replacing him with an independent PM.
The exit of the Boc government created the right premises for the opposition to call for the elections to be brought forward. Victor Ponta, the leader of the Social Liberal Union (USL), said that Boc’s resignation was the first step towards early elections. He added that the opposition was willing to discuss potential solutions and said that although the USL was in favor of early parliamentary elections it would support “stability and balance” until then. “I think that we can make a democratic transition. We are open to discussing any responsible formula, to have elections that will not mean the complete destruction of what is left of Romania,” said Ponta.
Last but not least, Mugur Isarescu, the governor of the National Bank of Romania (BNR), said recently that any change of government through constitutional procedures was not comfortable for markets. “Any major political change is a stress factor for markets but it can be assimilated and accommodated by them and managed by the BNR if it is quick and developed in a constitutional frame. We don’t see any visible elements of stress on the markets and things are under control so far. We hope it remains the same,” said the governor, quoted by Mediafax. Asked if the Central Bank would react if the political situation were to deteriorate, Isarescu said, “Of course, we will not stay as an observer to watch things getting worse. We have never adopted the position of staying and seeing what is happening on the market. We also intervened in less critical moments,” he said.
Regardless of what kind of elections Romania will have this year – early or not – 2012 is a crucial year for the country because of its significant implications on the local economy. “In general, election years have so far been years with economic growth compared to the previous period. There is higher demand at an integral level because of the direct and indirect election expenses. Plus, governing parties and local administrations make more ‘image’ investments in election years, like improving parks and roads, planting or sewerage and gas grids. Most of these investments create arrears as a result. Hence, the effects are mixed,” says Dragos Cabat partner at efin.ro.
Andrei Brasoveanu, managing partner at Ciurtin, Brasoveanu & Partners, believes that the local economy is more influenced by the financial crisis than the upcoming elections. The unfavorable economic context and the fall in both companies’ business and incomes are the current concerns of the business environment. The austerity measures taken by the former government and its economic policies that were criticized for lack of efficiency or opportunity could persuade players on the market things are going to change if the opposition wins the elections. They could therefore hope that if a new government is elected, the new executive will adopt favorable measures for the business environment and set out to support it rather than tax it. “From this perspective, we think that the impact of the elections on the local economy will be a positive one, but it must be preserved and capitalized on afterwards through the economic measures that the new government adopts. If not, there will be no notable effect,” warns Brasoveanu.
What are the main effects of an election year?
Elections make it tempting for a government to enact short-term measures to stimulate the economy and improve living standards before the poll. At the same time, governments throughout the world often avoid implementing policies which may be necessary but are likely to prove unpopular. “However, I hope the Romanian government will avoid these temptations. There are plenty of ways in which the government can stimulate sustainable, long-term growth,” says Mark Gibbins, partner at KPMG, head of taxation services. He adds that the government could work for an improvement in the take-up rate of EU funds, particularly for badly needed infrastructure projects. It could also promote stability in fiscal legislation and avoid making changes at short notice which are disruptive to business. “It is to be hoped that all parties, whether government or opposition, will present realistic programs based on the current, admittedly difficult economic realities as they prepare for this important election,” adds Gibbins. “The whole economy will benefit if the government focuses on long-term growth, and would suffer if short-term populist policies were to be adopted.”
Facing new challenges
Following the departure of the Emil Boc cabinet, one of the main challenges for its successor is to maintain and improve, if possible, the current macroeconomic indicators. One of the most important things for the incoming government is to respect the terms of the agreements with the IMF and EU and keep the budget deficit under control, while at the same time taking measures to stimulate growth. “One of the challenges the Romanian economy could face is contagion from the Euro zone debt crisis, and a general Euro zone downturn, which could make Romania’s recovery more difficult. However, there are many opportunities for growth through business with countries outside the Euro zone,” says the KPMG representative. He gives the example of Chinese investment in Romania, which has increased a lot, while many local companies are discovering the possibilities of China as an export market.
The level of exports is one of the crucial elements for the coming period because it relates closely to the economic growth that Romania will post this year. “If exports decrease because the situation in the EU region deteriorates – a scenario that seems to me less probable now – then economic growth can come only from internal consumption in 2012. Therefore the austerity program should be ‘relaxed’. If things are normal, we can post economic growth even if the austerity program is maintained in its strict form. This approach would help avoid macroeconomic side slips,” says Cabat.
According to Brasoveanu, one of the main challenges the local economy will face this year is to ensure efficient governance during the election campaign, when the political parties will focus their efforts on winning votes. “The election campaign does not have to affect the activity of the government or Parliament. From an economic perspective, the business environment will have greater expectations because it will rightfully expect an improved situation if there is a change in governance,” says Brasoveanu.
How do the elections influence business?
One interesting question is whether companies will postpone any decisions about their market strategy until after the elections. The answer depends on the company and the country. Where companies are confident that there will be a high degree of continuity from one administration to the next, and that any changes to tax or other legislation affecting business will follow a realistic timeframe which allows companies to plan ahead, the impact of elections will be limited.
“I believe that most Romanian companies are hoping that the government will continue to focus on long-term growth and avoid short-term populist measures. They are also hoping for a high-quality debate between all parties, which will focus on effective solutions to meet the country’s long-term needs,” says Gibbins.
One of the lifelines for some companies during an economic crisis is to focus on projects for the public sector, like infrastructure ventures. The reason is that in general, incomes generated by the public sector are considered to be safer that those created by private companies, despite their longer payment terms. Also the risk of a public partner becoming insolvent is lower than for a private one.
“Hence it is possible that some companies will accelerate their public sector projects in order to obtain their envisioned results by the elections, while others will postpone their public sector projects or preserve them with no particular cause until after the elections, hoping to have new opportunities that they can capitalize upon after a potential change in governance,” says Brasoveanu.
Private companies that don’t depend on their relations with the state are clearly not influenced directly by the election year, but benefit from the general economic growth it brings. “The strategy of the companies varied more in the election years before Romania joined the EU, when there was a high political risk. Since 2007 the political risks have become almost nonexistent,” says Cabat. He adds that during election years economic growth is usually higher while arrears and/or the budgetary deficit often explodes six months before. In addition, the inflation rate increases both in the month of the election and the subsequent ones. Last week, the National Bank of Romania revised its inflation forecast for 2012 from 3 percent to 3.2 percent and estimates a 3 percent increase in prices from December-December 2013.
“Infrastructure projects have always been an efficient way of gaining voters’ goodwill. This year we can expect promises from politicians about improving infrastructure projects. Some interesting ideas about building motorways and other significant projects of public interest such as stadiums have already been discussed,” says Stefan Ponea CEO and managing partner at Industrial Access.
Asked to what extent the forthcoming elections could lead to favorable changes in the fiscal legislation to stimulate companies’ activity, Gibbins says that any incoming government will be subject to significant limits on its activities in the current economic climate. “Therefore while I welcome fiscal stimulants to encourage investment, these should be carefully focused on long-term growth, and respect budgetary constraints,” he says.