Fitch sees Romania's 2017 GDP growth at 5.1%, warns of overheating risks

Fitch sees Romania's 2017 GDP growth at 5.1%, warns of overheating risks gary yim/Shutterstock.com

BUCHAREST (Romania), August 23 (SeeNews) - Fitch Ratings said on Wednesday it keeps its projections that Romania will post economic growth of 5.1% this year but warned of 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 said in a commentary published on its website.

Romania's GDP increased by 5.7% on the year for a second successive quarter in the April-June period, marking the fastest growth in the EU, Eurostat data showed.

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.

"If the preliminary 2Q17 reading is confirmed and high frequency indicators remain strong, we may further revise our GDP forecast for the year," the agency said.

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.

Romania's 2017 budget is built on projections for 5.2% economic growth and sets deficit at 2.99% of GDP, a target that many find too ambitious.

Despite the good numbers, rapid growth has begun to presents risks to external indicators and there is also a risk of overheating as wages outpace productivity growth, Fitch warned.

The central bank BNR estimates that the economy is operating around 2 percentage points above full capacity, and Fitch expect the current account deficit to widen beyond 3% of GDP this year. BNR also revised its inflation forecasts higher at its last monetary policy meeting on August 4.

Strong growth has partly been a function of fiscal loosening, with cuts in excise duties and VAT leading to missed fiscal targets as tax revenue has remained flat and spending risen, analysts said. Romania's budget deficit on a cash basis over the first five months was almost three times as large as a year earlier.

"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, analysts concluded.

In mid-July, Fitch affirmed Romania's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with stable outlooks,warning on a growing budget deficit and economy overheating.

The issue ratings on Romania's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-'/F3, while the country ceiling has been affirmed at 'BBB+' and the short-term foreign currency IDR at 'F3'.

In April, Moody's Investors Service has changed the outlook on Romania's Baa3 government bond rating to stable from positive due to deterioration in public finance and debt outlook for government of Romania.

Also in April, Standard & Poor's maintained Romania's rating at BBB-/A-3, with a stable outlook, and said that the country's deficit will widen due to the government's loose fiscal policy.

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