April 26 (SeeNews) - Romania’s government risks missing near-term fiscal targets given the increasingly challenging mix of rapidly slowing growth and rising inflation, made worse by the war in Ukraine, Berlin-based privately-held agency Scope Ratings said.
The war in Ukraine is having a profound impact on Romania (BBB-/Stable), pushing up inflation and raising risks to growth and public and external finances, already strained by last year’s energy crisis, Scope Ratings said in an analysis on Friday.
Growth will slow to 2-2.5% in 2022 from 5.9% in 2021 in Scope's baseline scenario, which represents a 2.5-3 percentage points downward revision from its forecast in December.
Also, inflation is expected to hit a near-double digit of 9% this year on higher prices for fuel and agricultural commodities, exacerbated by the Russia-Ukraine conflict. Romania's consumer prices rose by 10.15% year-on-year in March, compared to 8.53% in February, latest data from the national statistical office showed.
Higher commodity prices are also contributing to a widened current account deficit, projected at 8% of GDP this year, up from 7% in 2021, Scope added. The slowdown in growth represents a challenge to the government’s medium-term plans for a budget deficit of 6.2% of GDP in 2022 and a reduction in the deficit to below 3% of GDP by 2024, the agency noted.
The government's budgetary plan is based on a more optimistic, pre-war expectation of a GDP growth of 4.6% this year, Scope said, adding that it projects a deficit of 7.5% of GDP in 2022 given the less favourable economic context.
Scope reminds that the government is preparing fiscal support for households and business worth more than 17 billion lei ($3.8 billion/3.5 billion euro) – equivalent to 1.5% of GDP – in face of surging energy prices. Around 8 billion lei will come from the state budget, with the rest set to be drawn from EU funds.
In addition to expected budgetary modifications to capture the worsening economic environment, fiscal consolidation will likely be delayed until 2023, with the budget deficit unlikely to fall below 3% of GDP before 2025, Scope analysts write. Romania recorded an estimated deficit of 7.5% last year, ahead of an 8% target.
"Without significant fiscal reform to address rising pension costs, the stability of the medium-run fiscal outlook remains overly contingent on high economic growth as well as tight control of spending. However, the country’s record of unstable government and frequent changes of cabinet has tended to lead to expansionary fiscal policy. The new coalition government has nonetheless been stable since November 2021 despite differing views on judicial reform and fiscal policy," according to the analysis.
For now, disbursement of EU funding under the Recovery and Resilience Facility (RRF), which requires no co-financing, is partly compensating for the budgetary deterioration, Scope added.
Romania received around 1.9 billion euro ($2.1 billion) in loans under the RRF in January, in addition to 1.85 billion euro of prefinancing in grants in December 2021. In 2022, Romania plans to receive 6 billion euro in RRF monies, equivalent to around 2.5% of GDP, subject to progress on the planned reforms, including a review of the tax framework and improving energy efficiency in the economy. In addition, there will be first provisions from the 17 billion euro EU funding to compensate members states for housing and social services offered to Ukrainian refuges, which for Romania could reach over 2 billion euro this year, the agency also said.
However, in analysts' view, the coalition government faces a difficult task of passing and implementing pension reforms by 2023 and increasing tax revenues by at least 2.5 percentage points of GDP by 2025. At 26% of GDP in 2020, they were the EU’s second lowest after Ireland’s. Meeting these objectives is important to guarantee a steady inflow of RRF monies, worth 29.2 billion euro or 12% of 2021 GDP over 2021-2026, in addition to structural funds of around 50 billion euro or 21% of 2021 GDP for the 2021-2027 period.
The stable inflow of EU funding and the associated reform program are important rating drivers for Romania, Scope stressed, adding that improving institutional capacity for effective fund use would increase medium-run growth above the current potential estimated at 4% annually and help rebuild fiscal buffers. Romania had absorbed only 55% of structural funds under 2014-20 EU budget at end-2021, among the lowest for EU member states in central and eastern Europe, according to the agency.
The credibility of fiscal consolidation and reform underpin Romania’s credit ratings. A protracted deterioration of public finances or stalled reforms, with no alleviation of longer-term pressure on the
budget from rising pension costs, would present renewed risk for Romania’s credit ratings, Scope concluded.
(1 euro=4.9441 lei)