Standard & Poor’s: Romania’s economic growth will slow down starting 2020-2021

Aurel Dragan 02/09/2019 | 10:09

The growth rate of the Romanian economy will stay below 4 percent this year, after which it will decrease in 2020-2021 due to the slowdown in external demand, the reduction of the wage growth rate and a more neutral fiscal environment, according to the financial evaluation agency Standard & Poor’s, which reconfirmed the country rating of Romania at BBB- with a stable outlook.

“We expect the expansion of the Romanian economy to continue in 2019, with growth below 4 percent, stimulated by public and private consumption. In 2020, however, the economic growth cycle is expected to reverse, and the GDP advance will decrease to 3 – 3.5 percent and possibly even lower, as the fiscal impulse, the increase of wages and the external demand will reduce. The moment when the economic cycle reversal will take place is difficult to predict, but there is a risk that this reversal will take place more even faster than we currently forecast”, S&P report shows.

The agency stresses that one of their basic assumptions is that the Executive will tighten the budget to counter the expected increases in pension spending in 2020 and 2021, following parliamentary elections.

“Therefore, we expect the net contribution to GDP growth from fiscal measures to be only a modest positive in 2020 and practically zero in 2021”, says the rating agency.

S&P also points out that the economic policy stabilized after the Government’s revision of Ordinance 114, regarding a number of sectoral taxes, including a tax on financial sector assets, which in its initial form would have had negative consequences for the efficiency of the monetary policy, but nevertheless, the coordination of policies between the authorities remains weak, and the fiscal planning was “ad hoc and reactive”.

“We estimate that Romania’s fiscal deficit will remain at about 3 percent of GDP in 2019 due to solid GDP growth, the possibility of new dividends from state-owned companies and new cuts in investment budgets. The budgetary imbalances are accumulating, the expenses for salaries and pensions now exceeding 80 percent of the tax revenues”, shows the agency report.

Taking into account the following elections, the budget deficit will slightly increase in 2020, to 3.4 percent of GDP.

“Romania is preparing for presidential elections in 2019 and local and parliamentary elections in 2020. In view of this, we expect the government deficit to increase slightly to 3.4 percent of GDP in 2020. We believe that the pressures on Romania’s budget they will persist until 2022”.

The deficit increase to 3.4 percent of GDP in 2020 will have to be solved by the future Government.

“We expect fiscal adjustment to include waiving some of the pension increases envisaged in the recently adopted pension law. In addition, Romania’s larger deficit could cause the European Commission to start an excessive deficit procedure in 2020, which would facilitate fiscal prudence. Finally, fiscal adjustment could lead to a reduction in government consumption and a slowdown in economic growth”, notes the report.

The rating agency reports that the current account deficit could remain high by 2022, as government consumption and domestic demand will lead to higher imports. Together with the slowdown in exports, this will cause deficits to exceed 5 percent of GDP in 2020-2021.

“We note that the current account deficit is increasingly being covered by debt. We are seeing a lack of greenfield foreign investment, which suggests that investors may be increasingly reluctant given the rapid growth of wages, lack of infrastructure development and persistent political uncertainties. For this reason we expect that Romania’s external debt will continue to grow “.

The rating agency Standard & Poor’s reconfirmed on Friday the stable outlook of the Romanian economy and the BBB- / A-3 rating for long and short term debt in foreign currency and in local currency.

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