EC: Romania is confronted with increased risks-current account deficit deteriorates, increase of unit labour costs

Romania is confronted with increased risks in the form of the current account deficit deteriorating and the increase of unit labor costs, and the recent government decisions have increased the risks in the financial sector and they could negatively affect private investment, the European Commission shows in the Country Report Romania published on Wednesday. "Recent legislative initiatives create risks for the functioning of the financial sector. These include a parliamentary law retroactively capping mortgage interest rates and a government emergency ordinance imposing a tax on banks' assets linked to interbank interest. Furthermore, measures aimed at the second pension pillar, also passed into law by the emergency ordinance, may strongly hinder the development of capital markets, which are already very shallow in Romania. The new risks to the banking sector, the weakening of institutional investors and the increasing unpredictability of policy making may also dent private investment," the European Commission document called "European Semester - Winter Package: Assessing Member States' progress on economic and social priorities" underscored. According to the community executive, these decisions might generate a decline of the available credit, less investors on long-term and an instable and unpredictable climate for drafting policies. On the other hand, the European forum draws attention to the fact that Romania is confronted with increased risks in form of the current account deficit deteriorating and unit labor costs increasing. "From a nearly balanced position in 2014, the current account deficit increased to 3.2 percent of GDP in 2017 and is forecast to deteriorate further. Imports of consumer goods have increased much faster than those of capital and intermediate goods. Repeated increases of the minimum wage and public sector wages have put unit labour costs under growing pressure. The impact of the wage policies on cost competitiveness has so far been mitigated by a number of factors: productivity gains, a slow pass through to the tradeable sector of the rising economy-wide unit labour costs, and currency depreciation. However, the continuation of this trend entails potential competitiveness losses, leaving the country vulnerable to external shocks," the quoted source underscores. According to it, the governmental decisions regarding wages in public sector and the minimum salary played a major role in increasing the risks to cost competitiveness. Moreover, the expansionist fiscal policy has limited the margin of maneuver to amortize potential shocks. "The persistence of these trends can further harm the confidence of economic players, reduce the economy's capacity to adapt to shocks that may arise at home or spill over from abroad, and affect the economy's growing external financing needs as measured by the high and worsening external deficit," the EU Country Report mentions. On 21 February, Minister of Public Finance Eugen Teodorovici told AGERPRES that he asked the European Commission to include in its reports both the forecasts regarding the economic developments and the final results registered by the European states. According to him, the publishing of both forecasts and final data is important for lending costs, as well as for the development of ratings where the variations are very high. AGERPRES (RO - author: Constantin Balaban, editor: Andreea Marinescu; EN - author: Rodica State, editor: Adina Panaitescu)