March 27 (SeeNews) - Japan Credit Rating Agency (JCRA) on Monday said it has affirmed the outlook on Romania's long-term government debt in foreign currency and local currency to BBB/BBB+ stable.
The ratings are primarily supported by the country’s solid growth prospect, improving external position and a low level of government debt, JCRA said in a press release.
The agency also said that Romania's economy will grow by about 4% annually in 2017 and 2018, with sustained growth to be led by domestic demand with a moderate acceleration of inflation.
However, JCRA expressed concern over Romania's rising public deficit in 2017, as a consequence of the tax cuts approved by the previous government also came into effect from 2017. The fiscal deficit will likely exceed 3% of GDP in 2017 and 2018 unless adjustment measures are taken, the rating agency noted.
JCRA last reviewed Romania's rating on March 18 last year, when it upgraded the outlook on the country's long-term government debt in foreign currency and local currency, from BBB-/BBB to BBB/BBB+ stable.
JCRA also said in the statement:
"Rationale
(1) The ratings are primarily supported by the country’s solid growth prospect, improving external position and a low level of government debt. On the other hand, factors constraining the ratings include its financial system still in the process of improving. The outlook of the ratings is Stable.
Following the general election in December 2016, a new coalition government was formed by the Social Democratic Party and the Alliance of Liberals and Democrats. The new government has implemented a series of tax cuts as well as increases of the minimum wage, public sector wages and pensions which were part of the campaign agendas, while sticking to the target of maintaining
the fiscal deficit below 3% of GDP, the upper limit set by the EU. As a part of the tax cuts approved by the previous government also came into effect from 2017, the fiscal deficit will likely exceed 3%
of GDP in 2017 and 2018 unless adjustment measures are taken.
Nevertheless, Romania’s public debt (ESA2010) remains below 40% of GDP, providing some room to allow for a certain level of fiscal deficit. The fiscal policies in recent years seem to have been formed in the context of the election, and therefore JCR deems that efforts to curb the deficit will likely be pursued in the medium-term in compliance with the EU’s fiscal rule.
(2) Romania is a relatively large country among the Central and Eastern European countries with a nominal GDP of EUR169 billion and a population of 19.8 million in 2016. Its per capita GDP exceeds USD22,000 in PPP terms. Its economic structure is closely tied to the EU economy through trade supported by inward direct investment and the financial system. In 2016, the real GDP growth rate accelerated to 4.8% from 3.9% in 2015 boosted by the implementation of the
fiscal measures. The growth was driven by private consumption, which is expected to remain robust in 2017 supported by the fiscal measures such as tax cuts and an increase of the minimum wage. Despite a rise in private investment, the total investment growth has slowed due to the
lower public investment.
However, it is expected to pick up going forward on the back of eased
credit contraction, recovering inward direct investment and inflows of the EU funds under the 2014-2020 financial perspective. Barring significant changes in the external environment including
development of the EU economy, a growth rate of around 4% in 2017 and 2018 is likely to be sustained led by domestic demand with a moderate acceleration of inflation.
(3) After a significant consolidation between 2010 and 2015, the fiscal deficit has been widening since 2016 with the relaxation of fiscal policy. The general government deficit (ESA2010) increased to 2.8% of GDP in 2016 from 0.8% the previous year affected mainly by a series of tax cuts including a 4pp reduction of the standard VAT rate and an increase of public sector wages.
The general government debt to GDP ratio (ESA2010) represented 37.6% at the end of 2016, remaining relatively low among the countries rated in the BBB range by JCR. The new government is committed to maintaining the fiscal deficit below 3% of GDP from 2017 onward. However, some tax cuts and increases of public sector wages and pensions decided by the new government have been implemented in 2017 in addition to the further cut of the VAT rate and the elimination of the construction tax approved by the previous government. Without adjustment measures, the deficit will likely exceed 3% of GDP.
Nevertheless, JCR expects that fiscal discipline will work to curb the
deficit in the medium-term considering a possible initiation of the excessive deficit procedures by the European Commission. Romania has significant room to improve tax collection by enhancing
tax compliance and reducing tax evasion. In this regard, the government looks set to take measures in an attempt to increase tax revenues.
(4) The country’s financial system has been in the process of improving with advancing disposal of nonperforming loans by banks. The nonperforming loan ratio (based on EBA definition) of the banking sector further declined to 9.5% at the end of 2016 from 13.5% a year earlier, a major improvement from above 20% in 2014. Banks’ profitability has also turned positive on lower credit
costs.
The debt discharge law, which enables a discharge of mortgage backed debts owed by individuals regardless of their ability to pay, came into force in May 2016. However, a risk of banks incurring huge losses was avoided following the Constitutional Court’s subsequent ruling which
substantially narrows the scope of its application. Loans to the private sector have been continuing to recover, albeit slowly, led by lei-denominated loans especially housing loans. Loans
denominated in foreign currency have steadily decreased, accounting for around 40% of the total loan portfolio, down from the peak of over 60% in 2012. This has helped reduce the foreign currency risks of the banking, corporate and household sectors.
(5) The current account deficit has been widening amid the growth of domestic demand. Nevertheless, at 2.4% of GDP in 2016 (1.2% in 2015), it remains substantially low compared with the levels
before 2008, supported not only by growing exports of manufactured goods such as automobiles but also by an increasing services account surplus. Romania seems to face no difficulties with external financing as stable capital inflows through direct investment and the EU funds have been adequately covering the current account deficit. It has also made a steady progress in repaying loans to the IMF and the EU. Its external debt has been declining both in terms of GDP and goods
and services exports due mainly to the banking sector’s reduced external borrowing.
As of the end of 2016, the external debt stood at 54.7% of GDP and 132.7% of goods and services exports, down from their peaks of 75% at the end of 2012 and 253% at the end of 2009."
($=0.9202 euro)