Fitch: Romania's Robust Growth Is Not Risk Free

Romania’s GDP increased by 5.7% year-on-year for the second successive quarter in the second quarter of 2017, Eurostat said last week - the fastest growth in the EU. Fitch revised its real GDP growth forecast for 2017 up to 5.1% from 4.8% when it affirmed Romania's 'BBB-'/Stable sovereign rating last month. If the preliminary 2Q/2017 reading is confirmed and high frequency indicators remain strong, Fitch may further revise its GDP forecast for the year.

Fitch forecasts growth to slow in 2018 and 2019 as policy stimulus eases, to 3.4% in 2018 and 3.5% in 2019, but it will remain above the 'BBB' category median (of around 3%), allowing further convergence of GDP per capita with rating peers.

However, rapid growth has begun to present risks to external indicators and there is also a risk of overheating as wages outpace productivity growth. The National Bank of Romania (NBR) estimates the economy is operating around two percentage points above full capacity, and the current account deficit is expected to widen beyond 3% of GDP this year. The NBR also revised its inflation forecasts higher at its last monetary policy meeting on 4 August.

Moreover, strong growth has partly been a function of fiscal loosening. Cuts in excise duties and VAT have led to missed fiscal targets as tax revenue has remained flat and spending risen. Romania's budget deficit (cash basis) over the first five months was almost three times as large as a year earlier. Fitch expects some offsetting cuts to government consumption and capital spending (where Romania has a track record of under-execution), while higher wages will increase social contributions. But, Romania's deficit is still expected to widen this year, to 3.7% of GDP, from 3% in 2016, and baseline projections see general gross government debt rising to 43.6% of GDP at end-2019 from 37.6% at end-2016, according to Fitch.

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