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New government, old challenges

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Fitch Ratings has recently affirmed Romania's Long-Term Foreign-Currency Issuer Default Rating at 'BBB-' with a Stable Outlook, noting that the "toppling of the PSD government in October has raised political and policy uncertainty at a time when fiscal and external metrics are weakening." Regarding the newly-formed PNL government, the rating agency acknowledges its difficult mission, and indicates that "with less than one-quarter of the seats in parliament it will have to rely on support for smaller parties with divergent policy interest to implement legislation."
So, in the current context, Fitch points out that its "baseline scenario is of a further gradual weakening of the public finances over the short to medium term." It also emphasizes that the general budget deficit reached 2.6% of GDP in January-September 2019 (compared with 1.8%, 0.8% and 0.5% in the same period in 2018, 2017 and 2016, respectively), underlining that expenditure increased by 15.3% yoy on the back of "higher personnel, transfers and capital spending." It also notes that the structure of the deficit is increasingly rigid, with wages and social transfers accounting for nearly two-thirds of expenditure. Meanwhile, efforts to increase tax efficiency have been unsuccessful. "We believe there is still scope for the deficit to be only slightly above 3% of GDP deficit by end-2019 (and therefore avoid the Excessive Deficit Procedure), but this would require ad-hoc adjustments, which will not represent structural improvements in fiscal accounts," according to a Fitch release.
In addition, the fiscal outlook is expected to become more challenging in 2020-2021 "given a weaker macro backdrop and already legislated pension hikes (leading to an annual average pension increase of 24% in 2020 and 26% in 2021)." Under the circumstances, Fitch expects the deficit to widen to 4% of
GDP by 2021, "assuming that some offsetting measures to the pension increase are found." In turn, the current account deficit "remains under pressure from weakening external demand and strong import growth underpinned largely by expansionary fiscal policies." Fitch's press release reveals that Romania's current account deficit is expected to remain around 5% of GDP, "assuming no sharp fiscal deterioration and a gradual recovery in external demand by 2021."
Moreover, Fitch forecasts a gradual slowdown in economic activity over the next two years, "although a stronger investment performance in 1H19 has
led us to revise our 2019-2021 growth forecasts to 3.5% (from 3.1% previously
and above the current peer median of 3%)." In turn, private consumption continues to be seen as the key growth driver in the forecast, "albeit at a lesser pace as wages moderate from recent highs (gross average wages rose by 14% in January-August)." 
The credit rating agency also suggests that "weaker external demand, particularly in Germany has had a clear negative effect on overall export performance and in industrial sector activity. Industrial output has declined since March in yoy terms, with the August print (latest available data) the weakest in almost nine years. A more pronounced or prolonged deterioration could start to spill over to other segments, contributing to further GDP slowdown."  
On the plus side, Fitch indicates that the banking sector continues to be "sound", "with high levels of capital adequacy (19.6% in June) and liquidity."
Only time will tell if these predictions are accurate, but, in the meantime, Business Arena will continue to keep an eye on all the issues affecting the business community, reflecting its views, hopes and challenges. 

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