>>>The Moody's Financial Assessment Agency expects the tax incentives in Romania contribute to short-term economic growth, unlikely to be sustainable
By Andra Beltz
The Moody's Financial Assessment Agency expects tax incentives in Romania to contribute to sound economic growth in the short term, but it is unlikely to be sustainable.
According to Moody's Investors Service country annual report, real GDP growth is expected to be 6.5% in 2017, with an advance to slow down to 5% in 2018.
The Romania's credit profile (Baa3 with a stable outlook) reflects its strengths such as medium-term growth prospects, a moderate government debt-to-GDP ratio and debt sustainability, and challenges include controlling government spending, absorbing European funds and strengthening the governance of state-owned companies.
"While Romania has the experience of fiscal consolidation, the expansive policy of late has eroded the benefits of consolidation that has taken place since the global financial crisis. At the same time, the pro-cyclical macroeconomic policy has led to a rapid increase in wages, representing a risk to the price competitiveness of the Romanian economy and amplifying the current account deficit, "said Moody's analyst Daniela Re Fraschini, the author of the report.
Moody's is of the opinion that the underlying factors of economic growth, driven by private consumption, will probably remain unchanged, given that expansionary fiscal policy will continue in 2017 and 2018. However, the rating agency expects a slowdown in consumption private sector, while mitigating the impact of tax incentives. In addition, limited structural reforms, institutional weaknesses and institutional efficiency as well as economic policies that limit larger private investment continue to constrain Romania's long-term growth potential, Moody's points out.
According to the evaluation agency's report, Romania has made significant progress in correcting macroeconomic imbalances, creating the conditions for robust economic growth. However, these developments could be eroded in the medium term.
The rating agency argues that Romania's public finances continued to deteriorate in 2017, and Moody's expects this trend to continue in 2018. This was due to the fiscal and budgetary measures adopted between 2015-2016 under the new Fiscal Code, including a further reduction in VAT, from 20% to 19%, and legislative measures adopted by the new government in early 2017.
The strong economic growth contributed to a slight decrease in the ratio between government debt and GDP from around 38% in 2015 to 37.6% in 2016. Moody's forecasts that this ratio will remain almost stable in 2017-2018, supported by rising inflation and of solid economic growth.
The Moody's report shows that pressure may arise for an improvement in Romania's country rating as a result of more balanced and therefore more sustainable economic growth, from improving the institutional framework's efficiency as well as a lasting improvement in government debt and external debt.
Conversely, pressures for a downgrading of the country rating could arise from evidence of a significant deterioration in public finances, which would cause a significant increase in the government debt-to-GDP ratio and the external borrowing requirement. A further significant decline in external competitiveness or a significant deterioration in Romania's balance of payments and international investment position would also be negative for Romania's rating, warns Moody's.