Page 82 - Enforsa Foundation

are implemented, the general government fiscal deficit would widen to 3.7% of GDP by 2019, which would represent a breach
of the EU’s Excess Deficit Procedure threshold of 3% of GDP. Our baseline scenario for Romania’s general government
deficit does not factor in these proposed measures because they are subject to parliamentary approval. We have, however,
revised our estimates of Romania’s fiscal trajectory to incorporate a slight deterioration in government finances amid greater
political uncertainty ahead of the elections next year. We now project slightly higher government indebtedness, with general
government debt peaking at 40.7% of GDP in 2017, versus our earlier projection of a gradually decreasing debt-to-GDP ratio.
Net debt will remain lower than general government debt, at about 35% of GDP owing to fiscal reserves, which we project
will remain above 5% of GDP across our forecast horizon to 2018. Fifty-seven percent of gross general government debt is
denominated in foreign currency, predominantly Euros, indicating some vulnerability to adverse exchange-rate movements.

Romania’s external finances have rebalanced substantially from pre-2009 levels--on both stock and flow metrics--led by
banking sector deleveraging and an adjustment of the current account deficit toward a balance. We expect the current
account deficit will widen slightly over 2015-2018, reflecting higher domestic demand. However, an improvement in energy
efficiency and gradually increasing value-add in some pockets of Romania’s expanding export sector are likely to prevent
external imbalances from re-emerging. We anticipate that from 2017, Romania’s current account deficit will be overfunded by
surpluses on the capital account and the financial account. We think the latter will benefit from continuing FDI inflows, public-
and private-sector borrowings, and slowing net outflows from the financial sector as domestic lending opportunities increase.
Over time, the implied reserve accumulation may lead to exchange-rate appreciation, which we would likely see as justified
by underlying productivity growth. This would lead to rising wealth levels, as measured by dollar denominated GDP per capita.

With inflation below its target, the National Bank of Romania (the central bank) has resumed its easing cycle and reduced the
policy rate to 2% in six consecutive cuts since August 2014. Although Romania enjoys a managed-float exchange rate regime,
monetary policy remains constrained by the relatively high share of foreign currency used in the economy, especially in bank
lending. That said, we expect €o-ization to continue to decline, helped by National Bank of Romania policies, such as maintaining
higher reserve requirements for lending in foreign currency.

Because the majority of foreign currency loans are denominated in Euros, the Romanian private sector has been relatively
unscathed by the 20% depreciation of the Romanian leu against the dollar since April last year. We also note that given the
relatively low proportion of Swiss franc lending compared with some regional peers, such as Poland, there is less pressure
on Romanian policymakers to adopt a centralized approach for unhedged Swiss franc borrowers who have been adversely
affected by the franc’s recent appreciation.

OUTLOOK

The stable outlook balances the likelihood of risks to fiscal consolidation against Romania’s relatively robust growth prospects.

We could raise the ratings if Romania’s budgetary consolidation continues and public enterprise restructuring is implemented
successfully, leading to a reduction in net government debt, matched by a further decrease in private-sector vulnerability to
exchange rate fluctuations.

We could lower the ratings on Romania if any of the following scenarios materialized:

• We think policy reversals could cause general government deficits and indebtedness to increase
significantly more than we currently expect,
• Romania’s external imbalances re-emerge, or
• Stability in Romania’s financial sector weakens.”

82