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Although favorable overall, Standard & Poor's view of Romania's economic realities includes a series of warnings and a downside scenario that could lead to Romania's downgrading, National Bank of Romania (BNR) chief economist Valentin Lazea writes in an article published on the blog 'BNR Opinions'.
"Romania is about to successfully exit the first phase of the Covid-19 pandemic, because the government has made a responsible decision: having to choose between saving human lives and saving the economy, it has made the right decision to give priority to the former. Countries that did the opposite (the US, UK, Brazil, Sweden and many others) have paid an exorbitant price in human casualties. The electoral context of 2020 will put before the government another tough choice: between winning votes (by applying the 40 percent pension rise unchanged) and ensuring a sustainable functioning of the economy in the years to follow. By reaffirming Romania's BBB- rating (with a negative outlook) Standard & Poor's is counting on the government to make a responsible decision, in the sense that it will give priority to the functioning of the economy. Although favorable overall, the agency's opinion contains a series of warnings," says Lazea, and proceeds to analyzing these caveats in the article.
Thus, Lazea points out that Standard & Poor's indicates that "since 2018, and despite buoyant private demand and rising wage inflation, Romania has been running an expansionary fiscal policy, resulting in twin deficits among the highest for any major emerging market sovereign and rendering Romania vulnerable to potential domestic and external shocks."
In this context, the BNR chief economist remarks that the agency is being soft, and that the expansionary fiscal policies did not start in 2018, but in the summer of 2015, with the amendment of the Tax Code, so that in 2016 the budget deficit had already reached the maximum allowed limit of 3 percent of GDP.
"Let us note that in 2020, S&P forecasts for Romania a budget deficit of 8.0 percent of GDP and an external (current account) deficit of 4.8 percent of GDP. Let us compare these figures with those forecast by The Economist for two emerging economies with chronic issues: Argentina (budget deficit of 6.1 pct of GDP; external deficit of 0.3 pct of GDP) and Turkey (budget deficit of 6.3 pct of GDP; external deficit of 2.1 pct of GDP). No comment," writes Valentin Lazea.
