September 23 (SeeNews) - Romania's credibility and post-coronavirus economic recovery stand to be affected by the parliament's decision to retroactively increase pensions by 40% as of September 1, investors said.
"Such measures, especially those of an irreversible nature like the pensions’ increase, must be sustainable on the short, medium, and long term and must not be driven by any electoral motive which could hijack Romania’s credibility with its foreign partners," the American Chamber of Commerce in Romania, AmCham Romania, said in a press release on Tuesday.
AmCham's reaction came after Romania's parliament voted to retroactively increase pensions by 40% as of September 1 in an attempt to overturn a decision by the government for a smaller increase ahead of local and general elections.
According to AmCham, the adoption of these "unsustainable measures" represents a dangerous misstep which burdens the active population and future generations on the long run, and deepens social tensions. The parliament's decision was taken in spite of all warnings regarding the fragile macroeconomic situation, aggravated by the slowdown of the global economy and the national financial effort to support the fight against COVID-19.
"It is an unprecedented situation and a confusing message that Romania sends to the investment community, risking the downgrade of the country’s investment ratings, during the same week when the capital market upgrade became effective," AmCham said.
The organisation called for responsibility from all political decision-makers so that the measures and public policies adopted will not create budgetary imbalances but will contribute instead to a healthy macroeconomic situation of the country.
AmCham Romania has over 450 members - U.S., international and Romanian companies, both large corporations and medium and small enterprises.
For its part, the Foreign Investors Council (FIC) in Romania stressed on Tuesday that in order for Romania to have an economic future that transcends electoral cycles, especially at a time when the health crisis has caused turbulence for both the economy and companies, the most responsible gesture from the legislative authorities would be to ensure a budget structure that guarantees the economic recovery.
According to FIC, the recently adopted measures which will bring structural changes in the budget will generate, according to the central bank, the largest deficit in recent years, of 11% of GDP. These changes will have an impact on Romania's ability to access significant amounts of European funds and could trigger modifications in the ratings of international agencies, FIC warned.
One of the major problems with such a large budget deficit is the difficulty or even impossibility of financing it on the financial markets. This decision could trigger downgrade actions from rating agencies, hence further increasing the cost of public debt with a ripple effect of the whole Romanian economy, in the absence of a credible repayment strategy.
Consequently, Romania's competitiveness will be weakened from within and regaining the advantage lost in this way will bring additional costs in the medium term, FIC stressed.
Romania is already under the excessive deficit procedure and must present a fiscal consolidation strategy to the European Commission later this month, as well as a National Recovery and Resilience Plan to substantiate the allocation and financing from the EU, FIC noted.
FIC members represent a significant share of foreign direct investment in Romania, bringing together 130 of the biggest companies in Romania in terms of turnover.
Concordia Employer Confederation also expressed concerns on Tuesday regarding the fiscal effects of the pensions hike, stressing that Romania cannot borrow money indefinitely.
"Such massive increases under existent conditions of a deficit already beyond the limits of damage put too much pressure public finances, the country's ability to borrow and the exchange rate, all important for the business environment. The increased volatility that such decisions bring during election periods is counterproductive for the economic environment," Concordia said.
Although from a social point of view the increase of pensions is really necessary, as the average annual pension was in 2019 around 1,380 lei ($333/284 euro), it comes at a very difficult time for Romania, when the pandemic is starting to leave traces such as increaing unemployment and reducing budget revenues, Concordia added.
Concordia Employer Confederation was established in 2007 and brings together the most powerful sectoral federations in the Romanian economy, including seven of the top ten companies by number of employees and turnover.
In 2019, a law on a 40% increase of pensions as of September 1, 2020 was drafted by the previous Social-Democrat government and adopted by parliament, prompting warnings of ratings downgrades. Last month, in a bid to ease pressure on the budget, the Liberal cabinet led by Ludovic Orban issued an emergency decree scaling back the hike to 14% as of September 1.
On Tuesday, however, 242 MPs voted in favour of a proposal by opposition left-wing Social Democrat Party (PSD) to increase pensions by 40%, and not by 14%. A total of 147 MPs voted against and 18 abstained.
To enter into force, the pension revision decision must be promulgated by president Klaus Iohannis.
Reacting to the adoption of the new law, the floor leader of the ruling National Liberal Party, Florin Roman, said in a post on social media on Tuesday that his party will challenge it before the Constitutional Court.
Romania is scheduled to hold local elections on September 26 and general elections on December 6.
(1 euro = 4.8590 lei)