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Fitch confirms Romania’s rating at BBB- but warns: fiscal loosening is risky for macroeconomic stability

de Razvan Diaconu , 9.7.2018

Fitch Ratings confirmed on Friday Romania’s rating for long-term foreign and local currency debt at BBB-, with a stable outlook, but warned that fiscal loosening is risky for the macroeconomic stability.

“Romania’s investment grade rating is supported by the moderate level of the public debt, the GDP per capita and governance indicators that are similar to other BBB rating countries. However, pro-cyclical fiscal loosening is risky for the macroeconomic stability,” writes a release issued by the financial evaluation agency and quoted by News.ro.

Romania’s economy stagnated in the first quarter of 2018, quarter-on-quarter, with an annual growth of 4.2% compared to 6.6% in the last quarter of 2017. Economic growth fed by the rapid wage increase and the tax cut started to slow down, in line with Fitch’s expectations. As a result, the agency maintained the economic growth estimate at 3.8% in 2018 and 3.3% in 2019.

With a strong growth slowdown registered in the first quarter, worsening indicators of confidence in the economy, a stricter monetary policy and higher inflationary pressures, as well as new external uncertainties, there is a risk of a “hard landing” slowdown.

Balancing the tax policy with the macroeconomic stability is likely to be difficult for the Government. The expansionist tax policy has weakened public finances. Although Romania maintained the budget deficit below the threshold of 3% set by the Maastricht Treaty (2.9% in 2017), which is a strong anchor for the Government, it obtained that due to a high economic growth and the decrease in investment. Fitch believes this is not sustainable and anticipates that Romania’s budget deficit will increase to 3.4% in 2018 and 3.6% in 2019.

The Government’s target is a budget deficit of 2.96% in 2018, based on a 5.5% economic growth.

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