Romania's failure to deliver on promises of economic reform has earned it a reputation as the laggard of Eastern Europe.
By Tom Buerkle
July 2001
Institutional Investor Magazine
The center-right coalition that ruled from 1996 until the end of last year paid scant heed to budget discipline and tolerated inflation that never got below 40 percent. Privatization proceeded so slowly that after a decade 80 percent of large state companies remained unsold, and allegations of corruption tainted many of the deals that were made. The country's GDP has actually fallen 13 percent over the past four years. No wonder that, in terms of economic fitness, the European Commission ranks Romania at the bottom of the 12 countries seeking admission to the European Union.
So when Finance Minister Mihai Tanasescu traveled to London last month to promote a new Romanian Eurobond, he didn't dare mince words. "Romania has a very bad track record," he conceded to Institutional Investor. But Tanasescu stoutly insists that the Social Democratic minority government, which took over last December, "wants to demonstrate that we can go forward - not stop and go, but have sustained economic growth and keep on track in our relations with the Bretton Woods institutions."
The early signs are heartening. A surge in exports and industrial production helped Romania's economy grow at a rate of almost 5 percent in the first quarter. Bucharest hopes to obtain a new standby credit this summer from the International Monetary Fund, as well as a $300 million World Bank loan to restructure privatized companies.
As part of a plan to speed up privatization, Tanasescu says, the government intends to sell the country's largest steelmaker, Sidex, by the end of the summer and the biggest bank, Banca Comerciala Romana, before year-end. The finance minister vows to reinvigorate privatization despite many Romanians' concerns that it will cost jobs in the short term.
Completing these deals "would send a very strong signal" that Tanasescu and Prime Minister Adrian Nastase can deliver on some of Romania's promises, says Konrad Reuss, an analyst at Standard & Poor's. "It has turned out to be a fairly reform-minded government," he adds.
Still, the Social Democrats, who were in power from 1992-'96, have much to prove. They inherit an economic reform strategy that was worked out between their center-right predecessors and the EU a year ago but then immediately followed by big wage increases for the state sector.
Tanasescu vows to adhere to the tough-minded plan, which calls for shrinking the budget deficit from more than 4 percent of GDP to 3 percent and adopting a stricter wage policy to reduce inflation to single digits by 2004.
S&P recently upgraded Romania's long-term credit rating to B from B-. Although that's still among Eastern Europe's lowest ratings, it gave a well-timed boost to the E300 million ($259 million), seven-year Romanian bond issue last month - the longest-maturity debt Bucharest has ever been able to offer on the international capital markets. Nevertheless, the bonds' 600-basis-point premium over German government bonds highlights how much more repair work Romania must perform on its economy as well as its credibility. (By comparison, Hungary's recent E1 billion issue of ten-year bonds was priced at just 70 basis points above the Bund.)
The finance minister is optimistic. Romanians' attitude toward reforms has fundamentally changed, he says. "What is important is that they understand that this is the way - you cannot go back," says Tanasescu.
