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Break-up of Romania's ruling coalition could complicate economic adjustment - Fitch

Break-up of Romania's ruling coalition could complicate economic adjustment - Fitch gary yim/

BUCHAREST (Romania), September 4 (SeeNews) - The break-up of Romania's governing coalition increases political uncertainty ahead of a busy electoral calendar and against a backdrop of rising macroeconomic imbalances, Fitch Ratings said.

Political tensions also reduce visibility on the likelihood, scope and nature of possible efforts to contain a rising budget deficit, Fitch Ratings said in a press release on Tuesday.

On August 26, the Alliance of Liberals and Democrats (ALDE) withdrew from the coalition government it had formed with the Social Democratic Party (PSD) in December 2016. Tension between the two parties has increased since both performed poorly in May's European Parliamentary elections, Fitch noted.

Political uncertainty complicates economic policy at a time when fiscal and external metrics have weakened. The general government budget deficit was 1.8% of estimated GDP over January-July 2019 versus 1.2% and 0.6% in the same period in 2018 and 2017, respectively. According to Fitch, this is due to a sharp pick-up in expenditure combined with weaker-than-expected revenue growth.

"In our view, the corrective measures in the budget revision approved by the government in early August are insufficient to bring down the deficit to the budget target of 2.76% of GDP. We forecast the deficit to widen to 3.4% of GDP in 2019, from 3% last year, and believe the government's projections rely on optimistic revenue assumptions," Fitch said.

The current account deficit has also deteriorated, widening by almost 40% in the first half, primarily due to a sharp rise in the trade deficit. On a 12-month rolling basis the current account deficit was 4.95% of estimated GDP in June. Given that the deficit is not fully financed by FDI, this widening could push up net external debt. A weak administration or protracted political stasis could accentuate the policy challenge of improving medium-term fiscal and external sustainability, Fitch analysts said. 

However, not all policy uncertainty implies downside fiscal risks, Fitch added. For example, it is unclear if the government can move ahead with plans for a pension increase of 40% in September 2020 . If next year's increase did not happen, this would ease the pressure to lift revenues to match expenditure. 

"Overall, we think that political uncertainty increases risks to the public finances and of economic overheating heading into a busy electoral period. The 'muddle through' approach that has enabled Romania to meet the EU's 3% deficit target in recent years may become more difficult as growth slows and opportunities to reduce spending at short notice become fewer," the rating agency said.

 More predictable and credible policy making could better support fiscal consolidation or measures to improve macro-economic stability, Fitch concluded.

In May, Fitch Ratings said it has affirmed Romania's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with stable outlooks, but warned that 2019 budget relies on unrealistic macroeconomic assumptions.

(1 euro=4.7273 lei)