Wednesday, September 26, 2007

S&P: New EU Members Bulgaria, Romania Risk Overheating

26 September 2007, Wednesday

The economies of Bulgaria and Romania, the two Balkan neighbours that joined the European Union in Januay, are at a risk of overheating, a report released by international ratings agency Standard&Poor's claims.

The two countries, plus EU-hopeful Croatia, who targets entry to the bloc in 2009, have been at risk for some time, increasingly so in recent years, although price increases have been moderate as surging imports have kept a lid on inflationary pressures, according to S&P.

But with current account deficits reaching unsustainable levels in Bulgaria and Romania, although somewhat less so in Croatia, making this "pressure valve" less likely to be effective in the future, so overheating could lead to a drastic increase in prices.

"This will require a prudent response by policymakers, especially because tighter global liquidity conditions loom and political risks are on the rise as the endgame for the resolution of the final status of Kosovo has begun," said S&P analysts Moritz Kraemer.

The solution is to adopt a fiscal stance that would smooth out the fluctuations and prevent a hard landing, believes report author Remy Salters.

"Progress on that front is uneven among the trio, with Romania lagging in fiscal rigor, although this is partly balanced by a more flexible monetary policy," he said.

"A policy mix cooling down excessive domestic demand is therefore crucial to minimize the risk of asset and debt bubbles emerging and bursting, bringing the real economy down in the process," added Salters.

Bulgaria is rated by S&P at "BBB+", with Croatia one notch down at "BBB" and Romania at "BBB-". All three ratings have a stable outlook.

No comments: