Tensions between leftist Prime Minister Victor Pont and right-leaning President Traian Basescu led to the latter’s suspension by parliament earlier this month. The suspended president will face a referendum July 29 on whether he will remain in office.
“These developments have heightened market concerns that political turbulence could jeopardize the country’s fiscal consolidation achieved over the past three years and are credit negative for Romania,” Moody’s said, adding that political uncertainty could continue until, and even beyond, national elections scheduled this autumn, likely hindering structural reforms.
Moody’s has Romania on a “Baa3” rating, with negative outlook. The outlook was downgraded from stable at the end of June, due to the country’s exposure to eurozone risks.
The rating agency said market unease has caused the Romanian leu to weaken by over 2% against the euro so far in July, a sharper depreciation than in other comparable emerging markets during this period.
Currency depreciation has also pushed government bond yields higher, thereby increasing borrowing and debt repayment costs for all Romanian borrowers, the report noted.
“Market apprehensions notwithstanding, the government’s budget deficit in the first half of 2012 is actually lower than in the first half of 2011, during which time Romania had three different governments,” Moody’s said.
“Moreover, public disputes among political leaders are not new in Romania. In fact, the same president was suspended by Parliament in 2007, although he was not impeached in the public referendum at that time,” it added.
However, market unease around the current presidential impeachment process stems partly from the fact that both Basescu and the former ruling democrat liberal party have been tied to austerity measures over the past three years, whereas the current government coalition has been critical of those measures and has increased public wages since coming to power, Moody’s said.
Although Prime Minister Ponta has expressed his commitment to a multilateral loan agreement with the International Monetary Fund and the European Union, “there is a chance that in an environment of lower growth, euro area turbulence and rising anti-austerity sentiment in Romania and elsewhere, the fiscal deficit in 2012 will not fall below 3% of GDP, as the government has planned,” the report noted.
Missing the 3% target would keep Romania in the EU’s Excessive Deficit Procedure, which it had hoped to exit by 2013, Moody’s said.
Another negative consequence of recent political events has been international (including EU) leaders’ publicly expressed concern that the parliament’s suspension of the president violates the spirit of established legal and parliamentary procedure.
“International criticism of the political process has added to market concerns and, if it not adequately addressed, it could impair relations between Romania and the EU, which has been an important source of institutional and financial support for Romania,” the rating agency said.