Whilst Romania has made significant progress in correcting its macroeconomic imbalances and in consolidating government finances, there is a risk that fiscal easing might lead to a deterioration in the government's fiscal outlook and the economy's price competitiveness, Moody's Investors Service said in a new annual report.

The annual update, "Government of Romania - Baa3 Positive, Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"Romania's credit strengths include its moderate public debt burden and an improving institutional framework as the process of integration with the European Union continues," said Simon Griffin, a Moody's Vice President -- Senior Analyst and co-author of the report. "Other key strengths include its favourable medium-term growth outlook and the country's economic competitiveness."

Romania's main credit challenges include: limiting the growth of its government expenditure in 2016, increasing its absorption of EU funds and strengthening governance at its state-owned companies.

Over the next two years, Moody's forecasts that Romania's average growth will increase by close to 3-4% annually. Real GDP growth is projected to spike to 4.8% in 2016, following strong fiscal stimulus, and then to decelerate to a more sustainable 3.7% in 2017 and 3.3% in 2018.

Private consumption will remain the major driver of real growth, although to a lesser extent than in 2016, given Moody's projection of higher oil prices and a return to inflation. A continuation of the country's expansionary fiscal policy in 2017, including the elimination of a special construction tax and additional excise duty on fuel, as well as a planned reduction in the standard rate of VAT, will result in a material deterioration in its fiscal position.

Moody's expects Romania's fiscal deficit to increase to 3% of GDP this year, up from 0.8% in 2014, and to exceed 3% next year as the deficit-increasing measures will more than offset strong economic growth. Moody's views the significant deterioration in Romania's fiscal position and its impact upon its debt trajectory as potentially credit negative.

As a result of higher fiscal and structural deficits from 2016, and in spite of robust economic growth, Moody's expects Romania's general government debt-to-GDP ratio to return to an upward trend over the next few years, after having decreased slightly in 2015.

Moody's would consider upgrading the rating if Romania's robust real GDP growth continues, if there are further improvements in the country's institutional framework and effectiveness, if we see a prolonged stabilisation in government and external debt ratios, or a shift in the government debt structure that reduces refinancing risks.

Conversely, downgrade pressure would stem from any significant rise in the government's debt ratio and sovereign borrowing requirements, a decline in Romania's external competitiveness, or a deterioration in its balance of payments and international investment position.

Source: Moody's statement