FACTBOX-Key political risks to watch in Romania

BUCHAREST, Dec 3 (Reuters) - Romania, the EU's second poorest member state, is clawing its way out of a deep recession after rolling out austerity measures required by an International Monetary Fund-led bailout.

The southeast European country, where nearly 3 percent of the population live on $40 or less a month, had the fastest economic growth rate in the European Union until a real estate and credit bubble burst in 2008.

Below are the main political risks for Romania:

ELECTION

Leftist Prime Minister Victor Ponta, embroiled in a bitter dispute with centre-right President Traian Basescu, is favourite to win a parliamentary election on Dec. 9 but may not gain a majority, which will raise doubts over policy and hit markets.

Basescu appoints prime ministers and could nominate someone else from Ponta's Social Liberal Union (USL) in an attempt to split the party or ask one of his own rightist allies to try to form a coalition.

What to watch:

- How many seats will the USL win? Its ratings are mostly above 50 percent and the electoral system favours larger parties, but opinion polls in Romania have often proved inaccurate.

- A split parliament or dispute over the next prime minister could leave the country rudderless for weeks, raise doubts over the IMF deal that bolsters investor confidence and send the leu currency, debt and stocks sliding.

IMF BACKING

Romania has stuck to the requirements of the aid deal, pushing through unpopular measures, and is on course to bring down the budget deficit to 3 percent of GDP in 2012.

The USL and its main opponents, the Right Romania Alliance (ARD), have promised to seek a new deal with the IMF once the 5 billion euro ($6.50 billion) agreement expires early in 2013, an important commitment to maintain investor confidence.

What to watch:

- Whether the election causes substantial uncertainty over policy. The IMF has already expressed concern over Romania's failure to make long-term reforms such as privatising state assets and liberalising energy markets.

EURO ZONE

Domestic consumption remains depressed and the economy is stagnating. Romania remains particularly vulnerable to developments in the euro zone, its main trade partner.

Greek banks control about a sixth of the banking system and concern over the impact of the regional debt crisis has added to pressure on the leu and raised the cost of insuring sovereign debt.

What to watch:

- Whether euro zone parent banks cut their credit lines. Analysts say the government and central bank have the resources to cover the gap, but it would be a stretch and could put pressure on asset prices.

SMALL LABOUR FORCE

Romania's biggest long-term challenge is stemming the flow of its workers, many of them young, to richer European countries. Census data showed the population has fallen 12 percent over the last decade to about 19 million.

There are only about 5 million employees paying taxes and most of the rest are pensioners, children, subsistence farmers, self employed or people working illegally. The inefficient, oversized state sector is also a drain on public finances and accounts for nearly a quarter of employees.

What to watch:

- Romania urgently needs more foreign investment, which was worth just 1.9 billion euros in 2011. It must cut red tape and graft and encourage banks to lend to people wanting to set up small companies if it wants to defuse a demographic timebomb.

CORRUPTION

The jailing of former Prime Minister Adrian Nastase, a Ponta ally, on graft charges sent a signal that Romania was serious about addressing a widespread corruption problem.

What to watch:

- Ponta defended Nastase after his conviction and his government has yet to show how committed it is to keeping the pressure on corrupt officials. Several lawmakers from his party are under investigation for graft. ($1 = 0.7689 euros)

(Reporting by Sam Cage; Editing by Louise Ireland)