Romania Defence and Security Report Q4 2009

The report has lowered Romania’s short-term political risk rating to 51 out of 100 to reflect the increased risk to policy formation and government stability as the country experiences a deep recession in 2009. We believe that rising unemployment, fiscal reform – according the IMF-funded loan program – and the associated reductions in government spending will significantly increase the risk of social unrest, including strikes and protests.

Unemployment is increasing significantly. It is expected to rise to around 8.1% by the end of 2009 (from 5.8% in May and 4.9% in December 2008). Real incomes are being eroded, and living standards are declining. We anticipate that there will be further rises in the unemployment rate.

Romanians went to the European Parliamentary polls on June 7 to choose Members of the European Parliament (MEPs). Support for the two parties in the governing coalition, the Social Democrat Party (PSD) and the Democrat-Liberal Party (PD-L) was high, with the PSD receiving 31.1% of votes cast, while the PD-L obtained a slightly lower 29.7%. The most worrying development seen in the election was the sharp rise in support for the far-right Greater Romanian party. In the previous European parliamentary election held in Romania in 2007, the party received no seats in the body.

Inside Romania, the parliamentary elections last November resulted in an uneasy coalition government, comprising the Democrat Liberal Party (PD-L), with 166 seats, and the Social Democrat party (PSD), with 163 seats. Emil Boc (PD-L) is prime minister and Dan Nica (PSD) is deputy prime minister.

We believe that the Democrat Liberal Party (PD-L)-led government is the best option for ensuring Romania’s long-term political stability and economic growth. The party campaigned on implementing the EU’s anti-corruption reforms, and they are the most committed to proceeding with Romania’s convergence to EU norms.

The almost equal levels of support for both the PSD and the PD-L will help to shore up the stability of the broad-based coalition in the short term. Nevertheless, we believe the future risks to coalition cohesion are high. This is reflected in our short-term political risk rating for Romania of 53.8.

The Romanian economy contracted by over 8% in Q209, according to Romania's finance minister, Gheorghe Pogea, in August 2009, who said that this was an estimate. The IMF, in August 2009, predicted an 8.5% contraction in the Romanian economy this year. The government is planning to ask the IMF to increase the agreed budgetary deficit to 7% of GDP from the previous figure of 4.6%.

Romania's economy is affected both by slackening exports, caused by recession throughout the continent, as well as by the reduced in-flows of foreign capital. The global recession has slashed demand for exports and reduced foreign capital inflows. Business and consumer confidence is down, reducing domestic consumption. BMI predicts the beginning of a slow improvement in the country’s economy in the latter months of the 2010, and targets a 0.3% expansion in real GDP in that year. Thereafter, we predict that GDP growth will average 3.4% between 2011 and 2013.

The government has continued to make some genuine efforts to tackle the country’s extensive corruption.

While the European Commission's (EC) 2009 annual report on reform of the judiciary and improvements to the rule of law in Romania was not as critical of the country's progress as that of 2008, it is clear that the EC believes that Romania needs to introduce further reforms to meet EU norms. Despite the commission's finding that the country has a number of shortcomings that need to be addressed, we believe that Romania will continue to pursue its piecemeal approach to reform in these areas, at least at a sufficient pace to prevent a freezing or removal of EU funding.

The defence industry is expected to continue undergoing restructuring and privatisation. This process has led to dramatic redundancies in the recent past. Further reductions in employment in the Romanian defence industry are expected, levelling off over time.

The Romanian defence industry remains relatively small compared with its European counterparts.

Currently, the industry encompasses 27 state-owned companies and one research institute. Of these companies, 15 are grouped within RomArm. The remaining 12 state-owned firms are independent companies that have been placed on a privatisation list.

BMI has recently introduced to its Defence reports the City Terrorism Rating (CTR), which assesses the risk of a terrorist attack. The CTR takes into account the overall Terrorism Rating for the country in question and incorporates the ‘prevalence’ of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the ‘threat’ of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns.