26 June 2017 RON: Political deadlock

Natalia Kornela Setlak | Anders Svendsen

Prime Minister Sorin Grindeanu was ousted on Wednesday due to loss of support from his own party. We see politics, marked by elevated fiscal and political risks, to remain in focus and do not expect the RON to win back its previous losses.

Sorin Grindeanu, who was appointed prime minister after the general election that took place in December, was forced to step down by his own social democratic party, the PSD.

We see no major shifts in government policies, except for the possibility of a bigger push for less stringent anti-corruption laws. The elevated political and fiscal risks are thus likely to continue weighing on the RON.

Problematic anti-corruption rules

After an impressive victory of the PSD with the support of 46% of voters, the party has by now had six months to live up to the numerous, costly election promises, including enacting tax cuts and increasing minimum wages and pensions. As we wrote back in December, the new government is characterised by lack of focus on corruption issues and high public spending, putting at risk the 3% fiscal deficit imposed by the EU. Due to President ’ refusal to appoint anyone facing corruption allegations for the Prime Minister post, PSD leader Dragnea could not run for the position himself and ended up appointing Sorin Grindeanu to take on the post.

After only six months of leading the country, Grindeanu and his government were ousted by his own party, leaving temporarily with no government. Even though economic growth has lost momentum in the country since the beginning of the year, it remains high compared to peer countries and citing the delay in implementing the economic and social reforms as the reason for the oust seems exaggerated. The main reason behind the need for removing Grindeanu from oce is thought to be his lack of focus and success on bending some of the anti-corruption rules, which could help some of the PSD senior members to avoid being charged.

Where do we go from here?

Grindeanu will remain in oce until the new government is in place. President Iohannis called the politicians for consultations on Monday, after which the new candidate for the prime minister post should be chosen. Before final appointment, the selected candidate needs to go through a no-confidence vote in the parliament within 10 days after his nomination, securing majority support for the government. As the Romanian government is in a state of cohabitation and most of the senior PSD members have hanging corruption nexus.nordea.com/article/38977/ron-political-deadlock allegations, it will be very dicult for Dragnea to pick a candidate like Grindeanu – an ally with a clear criminal record, which might prolong the negotiations once again due to disagreements between the two parties. However, it is rumored that the move will only aect the former Prime Minister and that Dragnea’s intent is to hire all of the previous ministers from other cabinets again once the new PM is appointed.

In our view, changing a Prime Minister will not entail any major shifts in the current government policies except for the possibility of deviating further away from the anti-corruption path than under Grindeanu’s leadership. A few names rumoured for the PM nomination to be announced this afternoon are , and Adrian Tutuianu. As the ousted PM claimed, no matter who will be chosen to take on the post, the person will have “no chance of exercising the role” as the PM’s actions are by and large steered from the PSD leader’s seat Dragnea.

EUR/RON to stay at high levels

Despite achieving economic growth exceeding its peers, consistently low inflation rates and high policy rate relative to country risk, the RON has underperformed peer countries this year. The currency continued weakening against the EUR on the back of increased political uncertainty and a mixture of market-friendly tax cuts and market-negative policies, which we see are set to continue.

Chart 1. The regional underperformer

Regardless of who will be the new Romanian PM, the political and fiscal risks will remain in place with the government policies continuing to be quite hasty and sometimes unpredictable. Even though EUR/RON is taking a breather – Grindeanu staying in oce until the next PM is appointed ensures continuity and sends a positive signal to international investors and governments on stability in the country. nexus.nordea.com/article/38977/ron-political-deadlock However, we are not too optimistic about the RON in the medium-term. Despite being one of the goldilocks on the European map with high economic growth and low inflation rate, elevated risks will, in our view, continue to weigh on EUR/RON performance and lead to EUR/RON cross anchoring in the range 4.55-4.65 for the next months, implying hovering around the 4-year high for longer.

We could see risk on the downside if the central bank will start actively supporting the currency in the market. On the other hand, we do not believe that the EUR/RON cross would stay at a level higher than 4.65 for any prolonged period, as the weakness of this level was only seen shortly back in mid-2012 and would probably be capped by the central bank.

Chart 2. Continued RON weakness

Natalia Kornela Setlak Anders Svendsen Analyst Chief Analyst [email protected] [email protected] +45 55467229

nexus.nordea.com/article/38977/ron-political-deadlock

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