Romanias fiscal problems are superficially less severe than in some members of the eurozone club that it wishes to join. The general government deficit has shrunk by more than a third since 2009 to just below 3% of GDP and its debt, though rising, is only 38% of GDP.
However, ECR experts have become more concerned about the government finances during the past 12 months, particularly in connection with a deteriorating economic-GNP outlook and monetary policy/currency stability. Political dimensions have similarly unnerved country-risk experts.
In theory, Romanias economic prospects should improve after a drought weakened the agricultural sector last year, but better fortunes are still being undermined by weak consumer confidence particularly in the context of tightened credit standards problems in absorbing EU funds and constrained demand for non-agricultural exports.
The problem is not the political mandate, which is considerable after a decisive victory for Victor Pontas ruling centre-left coalition at the parliamentary election in December. Rather, it is the difficulties of power-sharing between a centre-left prime minister and a centre-right president, and the unpopularity of the stringent reforms required to keep Romanias fiscal targets on track and to ensure financial support from the IMF.
As DZ Bank notes in its latest Emerging Markets Quarterly: Over the upcoming months, high amounts of IMF debt repayments are due [by Romania]. This is only one of the reasons why a new agreement with the IMF and other lenders appears necessary. As negotiations are expected to be tough, we do not see much potential for Romanian spreads to narrow.
The Romanian population is fed up with reforms if those require some kind of austerity first. In light of this even a new agreement with the IMF [the current one expires soon] is put into doubt, which would likely be seen as a risk by many external investors.
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