December 20 (SeeNews) - The significant deterioration in Romania's fiscal position and its impact upon the country's debt trajectory could weigh on Romania's rating outlook, Moody's said on Tuesday.
"A continuation of the country's expansionary fiscal policy in 2017, including the elimination of a special construction tax and additional excise duty on fuel, as well as a planned reduction in the standard rate of VAT, will result in a material deterioration in its fiscal position," Moody's said in its annual credit analysis update on Romania. Romania currently has a Baa3 rating from Moody’s, with a positive outlook.
Moody's expects Romania's fiscal deficit to increase to 3% of GDP this year, up from 0.8% in 2014, and to exceed 3% next year as the deficit-increasing measures will more than offset strong economic growth.
"Moody's views the significant deterioration in Romania's fiscal position and its impact upon its debt trajectory as potentially credit negative. As a result of higher fiscal and structural deficits from 2016, and in spite of robust economic growth, Moody's expects Romania's general government debt-to-GDP ratio to return to an upward trend over the next few years, after having decreased slightly in 2015," the report reads.
Downgrade pressure would stem from any significant rise in the government's debt ratio and sovereign borrowing requirements, a decline in Romania's external competitiveness, or a deterioration in its balance of payments and international investment position, the ratings agency said.
Romania's main credit challenges include: limiting the growth of its government expenditure in 2016, increasing its absorption of EU funds and strengthening governance at its state-owned companies, according to the report.
On the other hand, Moody's will consider upgrading the rating if Romania's robust real GDP growth continues, if there are further improvements in the country's institutional framework and effectiveness, if there is a prolonged stabilisation in government and external debt ratios, or a shift in the government debt structure that reduces refinancing risks.
"Romania's credit strengths include its moderate public debt burden and an improving institutional framework as the process of integration with the European Union continues," Moody's Vice President -- Senior Analyst and co-author of the report, Simon Griffin, said.
Other key strengths include Romania's favourable medium-term growth outlook and the country's economic competitiveness.
Moody's forecasts that Romania's average growth will increase by close to 3-4% annually over the next two years. Real GDP growth is projected to spike to 4.8% in 2016, following strong fiscal stimulus, and then to decelerate to a more sustainable 3.7% in 2017 and 3.3% in 2018.
The ratings agency expects private consumption to remain the major driver of real growth, but to a lesser extent than in 2016, given its projection of higher oil prices and a return to inflation.
In April and August, Moody's skipped the outlook and rating review for Romania. It last reviewed Romania's rating in December 2015, when it improved the outlook on the country's Baa3 rating to positive from stable. It then cited significant progress in correcting macroeconomic imbalances and a substantial reduction of the fiscal deficit in the recent past, contributing to a stabilisation of the debt-to-GDP ratio.
In October, Standard & Poor's maintained Romania's rating at BBB-, with a stable outlook, saying that policy uncertainty in the country is likely to remain elevated in the run-up to the December general elections, with possible further deterioration in public finances.