CEE will face tightening budget constraints, warns Moody's

CEE will face tightening budget constraints, warns Moody's
Many CEE government's such as Romania's have neglected investment and expanded current budget spending.
By bne IntelliNews January 19, 2018

Countries in Central and Southern Europe will have less scope for expanding budget spending in 2018 as tax revenue rises slow because of moderating economic growth, and central banks raise interest rates, according to the sovereign outlook for the region issued by rating agency Moody’s on January 17.

This constraint could particularly restrict Hungary and Romania, where the ruling parties have used policies such as cuts in taxes, increased social spending and hikes in public sector wages to boost their electoral support. 

Hungary’s budget deficit will remain within the EU Stability and Growth Pact limit of 3% of GDP, but Romania’s will breach the limit, Moody’s predicts. “Romania’s expansionary fiscal policy has caused its budget deficit to deteriorate significantly since 2015, and the authorities are at risk of breaching the 3% limit in 2018 and consequently entering the excessive deficit procedure,” Moody’s warns.

The sovereign outlook points out that structural deficits (which exclude cyclical effects and one-offs) have widened across the region, particularly in Romania, Hungary and Croatia. Moreover, governments have wasted the fat years by using spending for current needs rather than investment.

Romania is again the prime culprit here and the country “risks carrying over spending commitments into future years when growth might be lower”. Romania will also, alone in the region, record an increase in its debt burden as a percentage of GDP, despite the strong growth in its economy. It also suffers from a widening current account deficit.

Among other weaknesses besetting the region, the report lists unpredictable policy environments, deteriorating institutional effectiveness, demographic dynamics and labour shortages. Longer term, changes in the automotive industry (currently a regional strength), and a fall in EU aid could pose severe challenges.

This year, however, Moody’s predicts a stable outlook overall for the region’s creditworthiness, helped by strong private consumption growth and recovering investment, boosted by the EU fund cycle. The rating agency has Slovakia (A2) and Slovenia (Baa1) on a positive outlook and the remainder of the region on stable outlook.

In 2017 Moody’s upgraded Slovenia’s rating by two notches, and changed the outlook for Slovakia to positive, and for Croatia (Ba2) and Poland (A2) to stable. The outlook for Romania (Baa3), however, was changed to negative in April.