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December 1, 2020

Fitch warns Romania pro-cyclical fiscal policy, rapid wage growths increase overheating risks

Romania has posted another quarter of rapid economic growth, but pro-cyclical fiscal policy and rapid wage growth in 2017 have increased overheating risks, Fitch Ratings agency said on Wednesday in a press statement.

Fitch say that it revised its real Gross Domestic Product (GDP) growth forecast for 2017 up to 5.1 percent from 4.8 percent when it affirmed Romania’s ‘BBB-‘/Stable sovereign rating last month. “If the preliminary 2Q17 reading is confirmed and high frequency indicators remain strong, we may further revise our GDP forecast for the year.”

“We forecast growth to slow in 2018 and 2019 as policy stimulus eases, to 3.4 percent in 2018 and 3.5 percent in 2019, but it will remain above the ‘BBB’ category median (of around 3 percent), allowing further convergence of GDP per capita with rating peers. ”

“However, rapid growth has begun to presents risks to external indicators and there is also a risk of overheating as wages outpace productivity growth,” the agency warned.

Fitch argued that strong growth has partly been a function of fiscal loosening. Cuts in excise duties and VAT have led to missed fiscal targets as tax revenue has remained flat and spending risen. Consequently, Romania’s budget deficit (cash basis) over the first five months was almost three times as large as a year earlier. Fitch analysts expect some offsetting cuts to government consumption and capital spending, while higher wages will increase social contributions. But it still forecasts the deficit to widen this year, to 3.7 percent of GDP, from 3 percent in 2016, and the Fitch baseline projections see general gross government debt rising to 43.6 percent of GDP at end-2019 from 37.6 percent at end-2016.

“Medium-term fiscal policy is less clear following political changes in June, when Mihai Tudose of the governing Social Democratic Party replaced Sorin Grindeanu as prime minister after the latter lost a no confidence vote. The government subsequently revealed an overhaul of tax rates planned for next year, but it is not clear if this is compatible with its own fiscal targets, and the plans may cause political tensions.”

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