March 27 (SeeNews) - Romania needs to deliver on pledges to reform its pension system and improve tax collection in order to reduce budget deficits amidst sluggish economic growth and difficult financing conditions, Berlin-based privately-held agency Scope Ratings said on Monday.
The war in Ukraine is weighing down the outlook for Central and Eastern Europe (CEE) countries and Romania's reform momentum is important if it is to exit the European Union's excessive deficit procedure, maximise its access to EU funding and international debt capital markets, and improve its long-term economic growth, Scope Ratings said in an analysis.
In Scope's baseline scenario, Romania's gross debt-to-GDP ratio will increase to 51% by end-2023 and 53% by end-2024, due to a gradual reduction in the budget deficit.
The government aims to reduce the budget deficit to 4.4% of GDP in 2023, as economic growth is expected to slow down to 2.2% due to increased inflationary pressures.
"The government wants to address the structural budget deficit through pension reform, planned this year, and raising tax revenue by at least 2.5 pp of GDP by 2025. Progress here would help unlock generous EU funding under the Recovery and Resilience Facility, equivalent to 27.1 billion euro ($29.1 billion) or 9.5% of 2022 GDP until the end of 2026," Scope Ratings said.
It also said that improved near-term political stability under the majority coalition government led by the Social Democrats and Liberals supports the credibility of the government’s fiscal programme and increases the programme’s chances of being maintained for longer.
The affirmation of Romania’s BBB-/Stable Outlook ratings on 17 March reflects Romania’s access to domestic and external funding on relatively favourable terms within currently difficult market conditions, Scope noted. It however warned that the government's gross financing needs remain substantial, at about 11% of GDP for 2023, and that most of its borrowing will be done on the domestic market.
"Elevated financing needs will require foreign debt issuance, of around 8.5 billion euro or 2.7% of GDP this year, of which near 6 billion euro was financed in January," Scope also said.
The agency noted that any reversal of Romania's commitment to fiscal discipline and/or renewed challenges to the outlook for debt sustainability might put pressure on the 'BBB-' ratings.
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