Romania's budget gap and wage growth fuel inflation, S&P says
BUCHAREST, Oct 14 (Reuters) -A big budget deficit ahead of elections later this year has aggravated Romania's inflation, which is the highest in central and eastern Europe and will likely stay above target through 2027, S&P Global Ratings said in its latest ratings review.
S&P affirmed Romania's credit rating at BBB- with a stable outlook, underpinned by expected inflows of European Union development and recovery funds, but said it expected this year's budget deficit to top 7.3% of economic output.
At the same time, strong consumption has fed a surge in imports, fuelling a current account deficit expected at around 8% of economic output and leading to lower than expected economic growth of 1.6% this year, below the government's 2.8% estimate.
"Fiscal policy has partly pushed inflation to the highest level in CEE," S&P said.
"We therefore expect inflation to remain above the (central bank's target of 1.5-3.5%) through 2027, further exacerbated by a pro-cyclical fiscal policy and persistently high wage growth."
Romania's annual inflation fell to 4.62% in the year to September. The central bank currently sees it returning to target at the end of 2025.
Earlier this month, Romania's central bank held its benchmark interest rate at 6.50% after two consecutive cuts, saying inflation's downward path would be more erratic.
Ahead of presidential and parliamentary elections in November and December, analysts said the bank's scope to cut interest rates further was limited by widening twin deficits.
S&P said Romania has experienced one of the largest increases in real disposable income growth globally over the past year, spurred by a 20% wage increase in the public sector over the past year, several raises of the minimum wage, and a substantial pension hike.
The coalition government raised its consolidated fiscal deficit target to 6.94% of economic output in September, but the country's independent fiscal watchdog said unrealistic budget revenue and spending forecasts would likely push the shortfall to around 8% under local accounting standards.
All major rating agencies have assigned Romania their lowest investment grades with a stable outlook, and Fitch Ratings recently said fiscal slippage has damaged policy credibility.
Reporting by Luiza Ilie; Editing by Sonali Paul
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