Romanian PM resigns, implications (update)

Update
As expected the proposed PM who is the head of Secret Police Service in Romania belongs to the current ruling coalition. Thus, my first scenario was right and we should expect a government that will continue the same economic program made public until now.

Original Message
The implications for such a decision are for the short term but mainly for the long term. It is easier to assess the short term ones while for the long term we have to rely on scenarios.
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Short Term

I do not expect anything drastic to happen with the exchange rate or interest rates. On the FX market the NBR will thwart any attempt of the exchange rate EURRON to get too fast too close to 4.4. Unsterilized interventions, not expected until EURRON above 4.37 will push the short term rates higher.
On the bond market we might see more volatility with longer term yields expected to increase but as the market is very small do not expect high volatility.

The only major risk on the short term comes from outside Romania: Greece defaulting. It is a long shot but overlapping a Greece default with a PM resignation will be a negative shock for Romania via weaker RON and higher yields.

Long term

For the long term we have to work with scenarios. There are tow major ones and a minor one.
The first one, the most likely, the President proposes a PM from the current coalition and he/she passes the Parliamentary vote.IN this scenario we will continue with the current economic program where the fiscal code remains unchanged, do not expect any privations in 2012 but expect higher wages and pensions. Under this scenario expect moderate to no growth in 2012 but recession and higher taxes in 2013.

In the second scenario the President proposes a PM from the opposition and he/she [asses the Parliamentary vote. Under this very unlikely scenario expect a strong push for a change in the fiscal code which could entail lower social contributions, a differentiate tax code( no more flat tax) and a higher minimum wage. While the first one would be growth inducing and will lead to job creation the second and third will cancel out its effect. This scenario has a very small probability of becoming reality as the current coalition will want to be in charge of organizing the upcoming elections.

Third scenario, but the most unlikely, is the one where we have early elections. In that scenario we will see where the chips will fall and what it would mean for the future of Romania.

5 thoughts on “Romanian PM resigns, implications (update)

  1. There’s another thing, if another PM is not assigned fast, nobody in the public administration will assume any responsability for things more complex then answering the phone. There are a lot of sensitive decisions which need the back-up of ministers or other gov. officials, and if there are no persons in charge (except interims) then things will freeze in the public administration.

    Necessary investments in infrastructure, EU grants, decisions taken by state-owned companies will be postponed.

      1. I am mostly concerned about payments provided by public institutions representing EU grants (for the agricultural sector, reimbursement of eligible expenses etc), and certain important decisions to be taken by public companies (payment decisions to the private sector). The proposed solution is just temporary (the new PM) as things will certainly change in autumn 2012. Things are not working well indeed, but at least they have improved in 2011 compared to 2009 or 2010.

  2. To cut a long story short – all will be going from good to great according with your analysis! It seems romania is poised to have economic growth this year no matter who will be the prime minister.
    Interesting reading list – I think I’ve read 60-70% of it!🙂 And such could understand your optimism. Are you still looking for a corporate 9-to-5 job and that’s why you’re trying to be nice?

    1. I am not that optimistic mostly realistic about Romania: but small to zero growth in 2012 and recession and higher taxes in 2013 is hardly an optimist view. But yes in the short term the resignation is bound to be without implications for Romanian markets which are too small to care. ( or too small and easily controlled).

      Sent from my iPhone

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