S&P: Romania - High Risk of Economic Overheating

Romania is among the emerging European countries with the clearest signs of economic overheating, despite the continuous improvement of the economic condition. And that due to the investment growth outlook and the domestic demand, according to a report by Standard&Poor’s credit rating agency, presented by Mediafax.

In the report “Emerging European commissions keep growing, although some would prefer a less accelerated pace,” S&P warned over the importance of keeping the risks of economic overheating under control.

The five states most exposed to the risk of economic overheating are Romania, Bulgaria, Estonia, Latvia and Lithuania. Given the high demand for loans, one cannot tell if even the strict tax regimes in Bulgaria and Estonia can alleviate the surge of explosive growth demand, in order to ensure “a soft landing” of the economy, the report outlines.

Moreover, it may prove difficult for those countries to keep under control the risk of economic overheating, given that foreign imbalances are strongly linked to the capacity of generating exports, which is the case of Romania and Latvia especially.

Reactions to short-term economic policies must follow a “pick-and-mix” approach, which consists of cautious tax measures and monetary measures along with a toughening of banking standards, and, where need be, measures with clear objectives, such as adjusting the tax system in the real estate sector,” Remy Salters, a credit analyst at S&P says. The process of withdrawing from the present cycle could be sustained by the more severe monetary policies implemented by the Central European Bank, and by an increasingly limited development of production capacities, which restrict the development potential, Salters also said.

The number of improved country ratings has exceeded that of those revised down after year 2000 and the trend being kept reflects the sustained pace of development these economies have,” Ana Mates, a S&P credit analyst, said, adding that the perspectives of intensified investments and growth of local demand fuel the risk of economic overheating. 22 per cent of the country ratings to developing European economies have been improved and no such thing as negative rating changes have been noted, during October 1, 2006 - April 18, 2007.

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