Fitch diagnosis: the economy is overheating

Romania”s economy is displaying many of the classic signs of overheating, in particular a sharp widening in the current account deficit driven by rapid credit growth, a strong currency, and excess liquidity that could complicate the authorities” inflation-targeting efforts, warns an annual evaluation carried out by the Fitch rating agency.

The first international institution to talk about the overheating of the Romanian economy, this autumn, was the IMF, which announced its diagnosis in October: “The economy continues to overheat, with consumption demand exceeding the supply of goods and services, and translating into a wider current account gap and inflationary pressures”.

At the same time, the Fitch analysts believe the authorities must find solutions to the problem of too low budgetary revenues, standing at the lowest level of all EU members or candidates.

A year after first introducing Romania into the group of countries with an investment-grade rating, Fitch Ratings re-affirmed Romania”s “BBB minus” rating along with the mentioned warnings. “Romania”s investment-grade rating remains well-supported, but the authorities are facing a number of important challenges associated with the country”s success story. The economy is displaying many of the classic signs of overheating,” says Nick Eisinger, director in Fitch”s Sovereigns team.

Future ratings upgrades will hinge on signs that the current account deficit is easing, combined with more reassurance on the country”s external financing sources (FDI and clearer signs on EU accession) and concrete evidence of a successful inflation-targeting regime, as well as a sustainable medium-term fiscal strategy.