Moody's: Romania's credit profile reflects robust growth prospects and moderate government debt; constraints include rising government spending

Romania's (Baa3 stable) credit profile reflects strengths which include its favourable medium-term growth prospects, a moderate government debt-to-GDP ratio and strong debt affordability, Moody's Investors Service said in a new annual report. Its credit challenges include containing government spending, increasing its absorption of European Union funds and strengthening governance at state-owned companies.

The report, "Government of Romania -- Baa3 stable, Annual credit analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Although Romania has a record of fiscal consolidation, its recent expansionary stance has eroded consolidation gains that followed the global financial crisis," said Daniela Re Fraschini, a Moody's Assistant Vice President - Analyst and the report's author. "At the same time, pro-cyclical macroeconomic policy has led to rapid wage growth, posing a risk to the economy's price competitiveness and widening the current account deficit."

Romania has made material progress in correcting macroeconomic imbalances, paving the way for robust economic growth. However, these improvements could be eroded in the medium-term.

While Moody's expects fiscal stimulus to help drive strong near-term growth, it is unlikely to be sustained. Real GDP is expected to expand by 6.5% in 2017 before decelerating to 5.0% in 2018.

The drivers of economic growth, headed by private consumption, are likely to remain unchanged, as expansionary fiscal policy stance continues in 2017-18. However, Moody's expects private consumption to slow as the impact of fiscal stimulus on private consumption is likely to subside.

In addition, limited structural economic reforms, remaining weaknesses in the institutional framework and institutional effectiveness, and economic policies hindering stronger private investment continue to constrain Romania's long-term growth potential.

Romania's public finances continued to deteriorate in 2017 and Moody's expects this trend to continue in 2018. This is due to fiscal and budgetary measures adopted in 2015-16 as part of Romania's new Fiscal Code, including a further cut in VAT to 19% from 20% and legislative measures adopted by the new social democratic government since the start of 2017. Moody's expects the budget deficit to remain at 3% of GDP this year and exceed it in 2018.

Strong economic growth contributed to a further slight decline in the general government debt to GDP ratio in 2016 to 37.6%, from around 38% in 2015. Moody's expects the ratio to remain almost stable in 2017-18, helped by rising inflation and strong economic growth.

Upward pressure on the country's rating could stem from evidence of more balanced and hence sustainable real GDP growth, improvements in the country's institutional framework and effectiveness, and a prolonged improvement in government and external debt ratios.

Conversely, downward pressure could follow evidence of a further significant deterioration in public finances, causing an additional sizeable rise in the government debt ratio and sovereign borrowing requirements. A further large decline in external competitiveness or a significant deterioration in Romania's balance of payments and international investment position would also be negative.