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FACTBOX-Key political risks to watch in Romania

Source: Thomson Reuters Foundation - Fri, 1 Feb 2013 12:49 PM
Author: Reuters
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BUCHAREST, Feb 1 (Reuters) - Romania, the EU's second-poorest member state, is clawing its way out of a deep recession after taking austerity measures required for an International Monetary Fund-led bailout.

The southeast European country, where the average wage is around 350 euros a month, had the fastest economic growth rate in the European Union until a real estate and credit bubble burst in 2008.

Below are the main political risks for Romania:

POLITICS

A dispute between leftist Prime Minister Victor Ponta and centre-right President Traian Basescu has eased since Ponta's Social Liberal Union (USL) won a parliamentary election on Dec. 9, strengthening his hand and easing doubts over policy.

What to watch:

- Can the USL, a broad alliance of leftists, liberals and rightists, continue working together now it is in power or will branches of the alliance fall out with one other?

- Can Ponta work with his rival Basescu or will he seek to remove the president from office? The premier tried and failed to do this in July 2012, sending the leu currency, debt and stocks sliding.

IMF BACKING

Romania has pushed through unpopular measures to keep to the terms of its aid deals and met a target of bringing down the budget deficit to 3 percent of GDP in 2012, but has failed to make longer term reforms, particularly privatisations and using EU cash.

The IMF says these are needed to unlock growth and has given Romania until June to make concrete progress, or it will not complete the current 5 billion euro (${esc.dollar}6.7 billion) deal.

What to watch:

- Will the government sell a stake in pipeline operator Transgaz and start the process of offloading other state companies? If not, Romania will not be able to strike a new IMF deal after June and will lose market confidence.

EURO ZONE

Domestic consumption remains depressed and the economy is stagnating. Romania remains particularly vulnerable to developments in the euro zone, its main trading partner.

Greek banks control about a sixth of the banking system and concern over the impact of the regional debt crisis has added to pressure on the leu and raised the cost of insuring sovereign debt.

What to watch:

- Whether euro zone parent banks cut their credit lines. Analysts say the government and central bank have the resources to cover the gap, but it would be a stretch and could put pressure on asset prices.

SMALL LABOUR FORCE

Romania's biggest long-term challenge is stemming the flow of its workers, many of them young, to richer European countries. Census data showed the population has fallen 12 percent over the last decade to about 19 million.

There are only about 5 million employees paying taxes and most of the rest are pensioners, children, subsistence farmers, the self employed or people working illegally. The inefficient, oversized state sector is also a drain on public finances and accounts for nearly a quarter of employees.

What to watch:

- Romania urgently needs more foreign investment. Cutting red tape and graft and encouraging banks to lend to people wanting to set up small businesses would help defuse a demographic time bomb.

- The remaining restrictions on Romanians' ability to live and work elsewhere in the EU will be lifted by the end of the year, a move which has aroused some opposition in the United Kingdom and could sustain the emigration trend.

CORRUPTION

The jailing of former Prime Minister Adrian Nastase, a Ponta ally, on graft charges last year sent a signal that Romania was serious about addressing widespread corruption - an issue that the EU keeps under special monitoring.

What to watch:

- Romania must appoint a new general prosecutor and the head of an anti-corruption prosecuting unit, after two original candidates were rejected by the president, who cited a lack of transparency in the process. The European Commission has the nominations under close surveillance. (${esc.dollar}1 = 0.7420 euros) (Reporting by Sam Cage)

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