EIU: Romanian authorities must do more

Romania has much left to do in the key areas identified by the European Commission in its 2003 report; the authorities may have already made sufficient progress to be awarded the functioning market economy status; the PSD (Social Democrat Party) could be defeated in the general elections; a coalition government led by the D.A. (Dreptate si Adevar – Truth and Justice) Alliance of PNL-PD (Liberal Party and Democrat Party) would be less stable and more inexperienced than a PSD-led administration.

This how the Romania’s economic-political picture looks like as seen by the Economist Intelligence Unit (EIU), the analysis division of The Economist Group from the UK.

Persistent shortcomings include the accumulation of arrears in the budget and energy sectors, the failure to liquidate loss-making state-owned companies, the failure to establish natural gas prices that reflect short and long-term costs and the further restructuring and privatisation of key sectors such as energy, mining and transport.

The EIU, however, also identifies arguments that would speak in favour of Romania being awarded the functioning market economy status this autumn.

“Energy sector privatisation is now well advanced, despite fears that the forthcoming election would stall important sales,” EIU analysts believe, adding this is good news for the state budget. “Privatisation promises to have a much deeper effect, ending soft financial support for struggling enterprises and enforcing payment discipline across the economy,” EIU’s report shows.

The report mentions in this regard the completion of the most important transaction in the energy sector, by which Petrom was sold to the Austrian OMV Group. The latter group will pay 669 million euros for a 33.3% stake and later boost its interest up to 51% by contributing a further 723-860 million euros.

EIU believes this sale, along with the privatisation of the energy and natural gas distribution companies, indicates a “strong commitment to reform”.

Its analysts expect economic growth to reach more than 5% of GDP, as expansion picks up in the EU, new and modernised production facilities start to come on stream, investment activity intensifies and consumption growth remains strong.

Under the circumstances, retailers will also benefit from increases in real annual wages of around 7% in 2005, which will continue to boost household demand, as will continued rapid credit growth.

At the same time, EIU believes rapid wage growth should pose little threat to Romania’s competitiveness.

As for politics, EIU’s report says that neither the Alliance nor the PSD appear likely to form a majority government – and with around 30% of the electorate undecided, the outcome of the general election remains highly uncertain.