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Fitch Ratings: Pro-cyclical fiscal policy and rapid wage growth have increased overheating risks

Fitch Ratings keeps its projections that Romania will post economic growth of 5.1% this year but has warned of overheating risks on Wednesday

“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 said in post on its website.

In mid-July, Fitch revised its real GDP growth forecast for 2017 up to 5.1% from 4.8% while affirming Romania’s ‘BBB-‘/Stable sovereign rating.

Fitch forecasts that growth will slow down in 2018 and 2019 to 3.4% and 3.5% respectively, as policy stimulus eases. This will still leave Romania above the ‘BBB’ category median of around 3%, allowing further convergence of GDP per capita with rating peers, it said.

Fitch expects the current account deficit to widen beyond 3% of GDP this year.

“We expect some offsetting cuts to government consumption and capital spending (where Romania has a track record of under-execution), while higher wages will increase social contributions. But we still forecast the deficit to widen this year to 3.7% of GDP, from 3% in 2016, and our baseline projections see general gross government debt rising to 43.6% of GDP at end-2019 from 37.6% at end-2016,” Fitch said.

This would imply further deviation from the medium-term objective of a 1.0% structural deficit. 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 agency said.

Starting that time, 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, Fitch analysts concluded.

About Valeriu Lazar