Romania central bank says global uncertainties threaten emerging economies

BUCHAREST: The risk of a sudden shift in investors' perception of emerging economies has risen and could put pressure on Romania's economy quickly, the central bank warned on Tuesday, stressing the need for prudent fiscal and monetary policies.

Its comments follow victory in a parliamentary election on Sunday for the leftist Social Democrats, whose promises to raise wages and pensions have raised fears that Romania might breach budget targets set by the European Union.

The executive European Commission already expects Romania's budget deficit to quadruple from 0.8 percent of economic output in 2015 to 3.2 percent in 2017, in European accounting terms, its 3 percent of GDP ceiling.

In its biannual macroeconomic stability report, the central bank said uncertainty about global growth and geopolitical tensions could prompt investors to dump riskier emerging European assets.

For Romania, that risk was mitigated by manageable foreign funding needs and costs and a hard currency buffer that could cover several months of foreign debt payments, the report said. Foreign investors hold less than 20 percent of Romania's government bonds, limiting contagion risks.

The economy has recorded one of the EU's fastest growth rates this year, driven mainly by tax cuts and wage hikes. Funding costs have fallen, the benchmark interest rate is at a record low 1.75 percent and inflation is in negative territory

"Even so, risks to macro stability are significant," the report said. "Economic growth, based predominantly on domestic consumption, also put pressure on the trade balance."

"Romania's fiscal position has deteriorated in 2016, which can create problems with funding the public deficit as the domestic banking sector already has a high exposure to government debt," the central bank said.

Local banks' exposure to the public sector amounted to roughly 20 percent of all banking assets, the highest level in the EU, it added. Overall, the Romanian banking sector could withstand unfavourable developments, with a solvency ratio of 18.8 percent and non-performing loans down to 10 percent by the end of September, the bank said.

The Social Democrats are set to form a government with junior ally ALDE following their weekend election win, but a budget plan for 2017 is thought unlikely to be approved this year, prolonging uncertainty for investors.