BUCHAREST/LONDON (Reuters) - Almost every former Eastern Bloc country has suffered growing pains at some point over the last few decades. Romania’s just seem to keep coming back.

Drivers avoid potholes on the eastern portion of the Bucharest ring road, in Pantelimon, Ilfov, Romania, March 22, 2019. Picture taken March 22, 2019. Inquam Photos/Octav Ganea via REUTERS

Fumbling attempts to bring in new bank, energy and telecoms taxes in recent months are the latest example of its struggle to assert itself as a fully functioning economy.

Two years ago, growth outpaced nearly all its European peers, spurring hopes it was finally harnessing the potential of its 20 million population -- the second biggest in central Europe behind Poland -- and its own oil and gas reserves.

But having been inflated by some potent fiscal stimulus, the expansion is now fading so fast again -- to 4 percent last year from 7 percent in 2017 -- that some analysts fear another boom and bust is playing out.

Expectations are dimming that equity index provider MSCI might promote Romania to emerging market status alongside peers like Poland and the Czech Republic as soon as this year, which would draw money into its undersized financial markets.

The IPO market is at a standstill and the new taxes worried S&P enough that it threatened to change Romania’s credit rating outlook to negative.

Bucharest averted that by promising to tweak the measures to preserve central bank independence. But the confusion has only added to a view that policymaking has become unpredictable.

“The frequency of legislative changes has been increasing and often seems to come out of the blue,” said Franklin Templeton’s Romania CEO, Johan Meyer, who manages the Fondul Proprietatea fund which has stakes in a slew of state-owned firms.

“Sometimes the decisions do get reversed or watered down, but at that point the reputational damage has been done.”

As the country gears up for four elections in 2019-20, Finance Minister Eugen Teodorovici had said the measures would help the economy “aggressively in the good way” by lowering borrowing costs and energy prices.

A ROAD TO NOWHERE

In the 12 years since it joined the European Union, Romania’s per capita national output has doubled, to roughly 60 percent of the euro zone average, while record low unemployment led to double-digit average wage growth in the last four years.

But income inequalities are among the bloc’s highest. One-third of the population lives in poverty and millions lack sufficient access to healthcare and basic amenities like indoor plumbing.

Its population is both shrinking and aging, while backsliding in the battle against chronic corruption has led to mass street protests.

“Investor confidence is being eroded by persistent legislative instability, unpredictable decision-making, low institutional quality and the continued weakening of the fight against corruption,” the European Commission said in February.

And while Romania is up 16 places on the World Economic Forum’s Global Competitiveness Index since joining the EU, Bulgaria, which also joined in 2007, has leapfrogged it.

Graphic: Poverty levels in EU interactive - tmsnrt.rs/2UR8cEa

This month, a businessman from northeastern Romania opened a one-meter-long motorway, built in a day and paid for by him, in protest at the state of the country’s roads.

Romania has only 800 kilometers of motorways, less than half that of Hungary even though it is more than double the size of its neighbor and has almost twice as many people.

Just 75 kilometers have been built in the last three years and none go border-to-border despite years of government promises.

Central Bank Governor Mugur Isarescu routinely uses roads to highlight poor infrastructure that impedes economic development.

“Romania will be ready to join the euro when it has a motorway crossing the Carpathian mountains,” he has said.

Graphic: Romania motorways interactive - tmsnrt.rs/2Ol8Abt

PATCHY IMPROVEMENTS

A series of International Monetary Fund-led aid deals in 2009-2015 helped Romania shrink its budget and current account deficits, seen as a key weakness of the economy, and it won back its investment-grade rating in 2014. Its debt to debt-to-GDP is low, in line with the Czech Republic’s at around 38 percent.

But those twin deficits are rising again after tax cuts and wage and pensions hikes that have inflated consumption.

The external shortfall was 4.7 percent of GDP in 2018, a decade high, although the government has kept the budget deficit under the EU’s 3 percent ceiling by postponing investments.

“Policies focused on raising public sector wages and pensions have widened imbalances and at some point their adjustment will be unavoidable,” said the head of Romania’s fiscal watchdog Ionut Dumitru.

“The current account deficit is at a level that can no longer be ignored.”

Graphic: Romania's boom and bust cycles - tmsnrt.rs/2OfoiEO

PROMOTION PROSPECTS

Its financial markets are lagging too. Bucharest’s main stock market has only 16 companies and the tax changes have knocked banking and energy firms, leaving it with the lowest price-to-earnings ratio in the region.

Privatisations of firms like power utility Hidroelectrica, which were supposed to broaden and deepen the market and help its prospects of an MSCI promotion, have not materialized.

“They (Romania) are always remain on our radar screen. But so far it hasn’t reached the market classification framework requirements,” MSCI’s Sebastien Lieblich said, citing the small number of listed stocks.

Franklin Templeton’s Meyer blames government foot-dragging and a system whereby company directors can serve for just a few months, so that turnover at board level can hamper the six-to-nine month process of preparing a firm for the stock market.

He reckons up to five state-owned firms could easily be floated but sees none happening soon.

“It is like any promotion,” Meyer said of MSCI. “If you only do the bare minimum in your job you don’t get it.”

Graphic: Price-to-earnings ratio of Romania's stock market - tmsnrt.rs/2OaW3Hr