Romania’s 40% pension hike prompts anxiety among investors

The 40% pension hike adopted by the Parliament with the budget amendment bill on Tuesday, September 22, prompted concerns among local and foreign investors in Romania.

Investors' associations expressed fears that the public investments already at a low level will be squeezed out, while the deterioration of the public sector's balance could push down the sovereign rating, thus setting grounds for a deep economic crisis.

Romania's Parliament on September 22 passed the budget revision bill after amending it to leave untouched the 40% pension hike in September 2020, set through the Pension Law last year.

The Government, which intended to tone down the rise to 14% this September, said that it would refer the bill to the Constitutional Court. But the case is not straightforward, and the investors' fierce reactions reflect this.

The Romanian economy cannot support the 40% increase in pension expenditures, given the negative evolution of the global and inherently national economy, caused by the COVID-19 pandemic, according to the Coalition for Romania's Development (CDR).

"The business community is deeply concerned about the structural changes that the measures adopted by Parliament will generate in the state budget, which will no longer have resources for investments, although they should be the engine economic recovery," CDR said in a statement issued on Wednesday, September 23.

Romania will have to face additional costs when borrowing internationally to finance pension growth, which will deepen the budget deficit and trigger the spiral towards an economic crisis, CDR explained.

The Romanian-German Chamber of Commerce (AHK Romania), which represents German investors in Romania, said that the 40% pension hike represents a major risk for the Romanian economy and jeopardizes the economic recovery.

"Of course, we all want to increase wages and pensions in Romania for achieving a higher standard of living. But this cannot be done without serious impact studies and without taking into account the current economic context," the AHK said in a statement.

A sustainable budget would give investors confidence in Romania as an investment location and increase the country's competitiveness, German investors explained.

"These changes will have an impact on Romania's ability to access significant amounts of European funds and could trigger changes in the ratings of international agencies," Foreign Investors Council (FIC) said in a press release. One of the major problems with such a large budget deficit (11% of GDP as projected by BNR – e.n.) is the difficulty or even impossibility of financing it on the financial markets, FIC warned.