November 24 (SeeNews) - Moody's Investors Service said on Friday that although Romania has made material progress in correcting macroeconomic imbalances, these improvements could be eroded in the medium-term due to a loose fiscal policy and lack of reform.
Romania's credit profile reflects strengths which include its favourable medium-term growth prospects, a moderate government debt-to-GDP ratio and strong debt affordability, Moody's Investors Service said its report 'Government of Romania -- Baa3 stable, Annual credit analysis'.
However, credit challenges for Romania include containing government spending, increasing its absorption of European Union funds and strengthening governance at state-owned companies, the report showed.
"Although Romania has a record of fiscal consolidation, its recent expansionary stance has eroded consolidation gains that followed the global financial crisis," a Moody's Assistant Vice President - Analyst and the report's author Daniela Re Fraschini said.
"At the same time, pro-cyclical macroeconomic policy has led to rapid wage growth, posing a risk to the economy's price competitiveness and widening the current account deficit."
While Moody's expects fiscal stimulus to help drive strong near-term growth, it is unlikely to be sustained. Real GDP is expected to expand by 6.5% in 2017 before decelerating to 5.0% in 2018.
The drivers of economic growth, headed by private consumption, are likely to remain unchanged, as expansionary fiscal policy stance continues in 2017-18. However, Moody's expects private consumption to slow as the impact of fiscal stimulus on private consumption is likely to subside.
In addition, limited structural economic reforms, remaining weaknesses in the institutional framework and institutional effectiveness, and economic policies hindering stronger private investment continue to constrain Romania's long-term growth potential.
Romania's public finances continued to deteriorate in 2017 and Moody's expects this trend to continue in 2018. This is due to fiscal and budgetary measures adopted in 2015-16 as part of Romania's new Fiscal Code, including a further cut in VAT to 19% from 20% and legislative measures adopted by the new social democratic government since the start of 2017. Moody's expects the budget deficit to remain at 3% of GDP this year and exceed it in 2018.
Strong economic growth contributed to a further slight decline in the general government debt to GDP ratio in 2016 to 37.6%, from around 38% in 2015. Moody's expects the ratio to remain almost stable in 2017-18, helped by rising inflation and strong economic growth.
Upward pressure on the country's rating could stem from evidence of more balanced and hence sustainable real GDP growth, improvements in the country's institutional framework and effectiveness, and a prolonged improvement in government and external debt ratios.
Conversely, downward pressure could follow evidence of a further significant deterioration in public finances, causing an additional sizeable rise in the government debt ratio and sovereign borrowing requirements. A further large decline in external competitiveness or a significant deterioration in Romania's balance of payments and international investment position would also be negative.
In April, Moody's 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.
At the same time, the rating agency has affirmed the Baa3 long-term issuer rating and senior unsecured ratings, the (P) Baa3 MTN programme rating, as well as the Prime-3 (P-3) short term issuer rating of Romania.
On November 22, The European Commission (EC) said that Romania has failed to do enough to reduce its 2017 budget deficit and that the necessary annual adjustment needs to be at least 0.8% of GDP.
At the time, the EC warned Romania that it may not meet its budget deficit target and urged the government to take action to avoid the opening of an excessive deficit procedure.
Romania's 2017 budget is built on projections for 6.1% economic growth and deficit equivalent to 2.96% of GDP.
Earlier this month, the European Bank for Reconstruction and Development raised its expectations for Romania's economic growth to 5.3% in 2017, but warned that the government may not meet its budget deficit target.
In October, the International Monetary Fund (IMF) said that Romania's real GDP growth is projected to reach 5.5% in 2017 before it decelerates to 4.4% in 2018.
In 2016, Romania's economy expanded by 4.8%.
(1 euro=4.6536 lei)