Strategy Note /
Romania

Romania's new schizophrenic coalition

  • Market-friendly PNL (29% of parliament) and market-unfriendly PSD (34%) agree to form next government

  • Basis of this 'odd couple' is a populist fiscal stimulus of 1.2% of GDP and an 18-month alternating prime minister

  • Portends more fiscal indiscipline (6.7% deficit in 2021) and dysfunction; equities attractive for locals, not foreigners

Romania's new schizophrenic coalition
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
22 November 2021
Published by

A reporting line to two bosses never works well. Effectively, that is what is being put together in Romania as the two largest and ideologically opposed parties agreed, on 22 November, to form a government.

Both have committed to a populist fiscal stimulus package (a mix of a 10% increase in all pensions, a one-time top-up for low pensions and a minimum wage increase). This package amounts to 1.2% of GDP in 2022, which will make shrinking the fiscal deficit – 6.7% in 2021f, according to IMF forecasts – even less likely.

Both have committed to rotating the post of the prime minster every 18 months, starting with the PNL's Nicolae Ciuca and switching to the PSD nominee (likely Marcel Ciolacu) in May 2023.

The next scheduled general election is in March 2025. Three orderly transitions between the two unlikely coalition partners have to occur in order to get that far; the PNL has a generally market-friendly bias, and the PSD a market-unfriendly one.

Romania's schizophrenic coalition

Romania equities for locals, not foreigners

Romania equities are c6% of the MSCI FM 100 index. Measured by the BET Index, they are up 22% ytd, outperforming EU rule-of-law bête noires Poland (up 8%) and Hungary (up 9%).

Trailing PB is 1.6x (for 21% ROE), an almost 90% premium to the 5-year median. The equivalent comparison with the historical average in Poland and Hungary is a 13% premium and 9% discount, respectively.

That does not represent a compelling valuation case for foreigners, given the obvious domestic political, and, in turn, fiscal deficit, risk.

For locals faced with a negative 6.2% real interest rate and a 5-year local currency bond yield of 4.8%, the forward equity market dividend yield of 7.5% offers a compelling alternative.

Related reading

Romania risks early election and fiscal stress unless liberals reconcile, October 2021

Romania's weak government is negative for fiscal control and reform, October 2021

Romania's market-friendly coalition splits, minority government beckons, September 2021

Romania government should survive no-confidence vote to continue fiscal fight, June 2021

Romania election: Weaker market-friendly mandate than hoped for, December 2020

Romania: Pre-election polls imply narrow market-friendly win, October 2020

Romania: Upcoming election offers attractive risk-reward, October 2020

Romania: Market-friendly government inches closer, February 2020

Romania: Market-unfriendly government reportedly loses no-confidence vote, October 2019

Romania: Market-unfriendly government under pressure; potential positive, October 2019

Romania: Ruling party setbacks may be positive, May 2019

Romania: Populism to persist, reflected in cheap equities, April 2019