Romania: The political crisis aggravates the country’s worst Covid-19 wave

Event

In early October, PM Florin Citu’s centre-right coalition government collapsed, having lost the confidence of parliament over disagreements about budget plans and justice reforms. Last week, Nicolae Ciuca, President Klaus Iohannis’ designated PM, failed to win backing for a majority support. Hence, the political crisis continues while the country experiences its worst Covid-19 wave.

Impact 

Romania’s political crisis highlights endless political instability in the country. To avert snap elections, President Iohannis might nominate a technocrat deprived of political connections and able to gather a majority backing among most political parties. If not, new elections will probably be held in the context of widespread rejection of the government by the population. Political defiance is a strong explanatory factor behind Romania’s severe Covid-19 surge and low vaccination rates, which are currently common to most Central and Eastern European countries. Romania is experiencing its worst pandemic situation ever, with record daily death rates at about 23 per million people.  This is currently the world’s highest rate per capita. Faced with the more contagious delta variant, the situation is made worse by the vaccination rollout rate: a mere one-third of the population fully vaccinated. This is the second-lowest rate within the EU, after Bulgaria. Resolving the political paralysis would be a necessary minimum condition to mitigate the ongoing health crisis characterised by overburdened hospitals. However, the outlook is not promising, with a vaccination process expected to move forward slowly. 

While the political crisis and the Covid-19 shock harm economic activity, Romania is also confronted with high energy prices and extended supply chain disruptions. This is hitting manufacturing production and private consumption. Therefore, the economic momentum is likely to slow down in the months ahead and confirm weaker GDP growth forecasts for 2022 (+4.8%) vis-à-vis 2021 (+7%). Other factors will negatively weigh on the economic outlook. The deep fiscal deficit (expected at 6.7% of GDP in 2021) will constrain the room for fiscal support and also drag on the magnitude of the economy recovery. Rising inflation (+6.3% in September) will encourage the central bank to be more cautious, as seen with a recent, albeit small, interest rate increase last month. The deep current account deficit (above 5% of GDP) and weakened investment confidence on the back of prolonged political and Covid-19 uncertainty are likely to maintain slow depreciating pressures against the Romanian Leu. On the other hand, the EU Recovery and Resilience Fund is likely to boost investments in spite of Romania’s traditionally low absorption capacity of EU funds. All the risks mentioned above explain the stability of the business environment risk in E/G expected to continue in the coming months.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com