BUCHAREST May 3 Recession-hit Romania, the European Union's second-poorest member, is taking tough measures to stay within strict requirements for an International Monetary Fund-led economic aid package.
The southeast European country, where nearly 3 percent of the population live on a minimum income of $40 a month, had the fastest economic growth rates in the EU until a real estate and credit bubble burst in 2008. It now faces rising unemployment and social unrest against painful spending cuts and tax rises.
Its economy, which contracted more than 7 percent in 2009 and 1.3 percent last year, is struggling to recover and is dependent on IMF backing requiring strict control of spending and the budget deficit.
Below are the main political risks for Romania:
President Traian Basescu was re-elected in a close and disputed ballot in late 2009 and named centrist Emil Boc as prime minister. Boc is backed by ethnic Hungarians and independents, whose support he needs for a parliament majority.
Austerity measures including a 25 percent cut in public sector pay and a 5 percentage point increase in value-added tax to 24 percent have knocked the government's popularity, which is at about 17 percent compared with 33 percent in 2008 elections.
Boc has survived five no-confidence votes in the last 12 months and while the political uncertainty knocked asset prices, the opposition's failure to unseat him has made the government look more secure. Interest rates on government debt have fallen as a result.
What to watch:
-- The opposition may file fresh no-confidence motions. While these look unlikely to succeed, each motion causes disquiet among investors as there is always a slim chance of the government falling. [ID:nLDE7291TR]
-- Whether a new opposition alliance can maintain unity and hang on to poll ratings above 50 percent in elections next year, which would allow it to form a government without a coalition. [ID:nLDE7110CH]
In contrast to neighbouring Hungary, Romania has shown commitment to its IMF safety belt, pushing through unpopular austerity measures to bring down its budget deficit to 3 percent of gross domestic product in 2012.
It has struck a fresh deal with the IMF to replace the previous 20 billion euro ($29.3 billion) bailout, reassuring investors it is still committed to fiscal reform. Romania would only draw on the 5.3 billion euros under the new deal if needed. [ID:nLDE72P08U]
Demand for Romania's debt plummeted and the cost of insuring it rose when the IMF deal was put on ice due to a political crisis in late 2009. Previous hold-ups in payments have also knocked the leu EURRON= and blue-chip stocks .BETI.
What to watch:
-- The government's commitment to pushing through more reforms to bring the budget deficit within the IMF target of 4.4 percent of GDP for 2011, from 6.5 percent last year, with parliamentary elections due in late 2012.
The economy shrank less than expected on the year in October-December as the VAT hike hurt households and depressed demand, and managed some growth quarter on quarter. The government expects growth of up to 2 percent this year, lagging neighbours.
Recovery prospects are undermined by scarce foreign direct investment which fell to 2.6 billion euros in 2010 from 3.5 billion the previous year.
The central bank has left interest rates unchanged at a record low of 6.25 percent since May 2010 and may confound expectations of a cut this year as it struggles with imported inflation. [ID:nLDE71O05N]
Inflation was an annual 8 percent in March, far above the central bank's 2-4 percent target. Food prices rose 9.9 percent on the year. [ID:nLDE73A0HW]
Unemployment is at 5.9 percent -- about a quarter of jobless are under 29 -- but analysts say the true number is higher because the data do not include those no longer eligible for benefit. [ID:nLDE73J1QH]
What to watch:
-- Will the next rate move be a cut or a hike? Rates are widely expected to remain on hold for at least the next meetings in May and in June.
-- Potential central bank intervention in markets to prevent sharp swings in the leu. [ID:nLDE72L18A]
-- Any sign of Greek banks pulling in their horns to shore up their own balance sheets. Romania has borrowed some $19 billion from Greek banks, equivalent to 14 percent of total 2009 gross domestic product.
PROTESTS AND STRIKES
Some 30,000 people rallied in Bucharest in May 2010 against deep public spending cuts and there was a similar sized demonstration in October.
Other demonstrations and strikes have failed to gain much traction, suggesting protests are unlikely to sway government policy, and have not affected markets.
What to watch:
-- Can unions can gain enough backing for general strikes to extend them beyond one day? A prolonged national strike -- possible if resentment grows -- would raise pressure on the government and finances and eventually dent asset prices.
Romania is third among EU countries in rankings of perceived corruption and its failure to fight graft poses a risk to austerity measures and to the IMF-led aid deal.
The resignation of Romania's labour minister in April over a conflict of interest indicated favouritism and corruption may be becoming a bigger priority now the country has been blocked from the European Union's passport-free Schengen zone. [ID:nLDE73J0DL]
What to watch:
-- Will prosecutors send an important signal by convicting a top-level official for corruption?
-- Will other EU members be satisfied with progress on corruption along Romania's borders and allow it to join Schengen?
For political risks to watch in other countries, please click on [ID:nEMEARISK]
(Editing by Sonya Hepinstall) ($1=.6817 Euro)