“An unexpected increase of public expenditures would not only increase the budget deficit directly, but would also increase the risk of adverse indirect effects through the deterioration of market confidence,” Fitch’s analyst Gergely Kiss told MEDIAFAX in an email.
According to Fitch, the eastern European country is expected to stick to its fiscal and economic targets under the loan program agreed with its foreign creditors.
However, “a material slippage from the fiscal targets, especially if it were caused by more permanent measures and thus increasing the risk of a divergence over the medium term as well, would be a negative development,” Kiss said.
Additionally, an increase of nominal wages exceeding productivity gains would “ultimately lead to inflation, endangering the results of the successful disinflation trend seen in the last quarters,” he added.
In a speech in parliament Wednesday, Romanian President Traian Basescu said the lawmakers must find a solution to increase wages in the public sector to the levels before a 25% pay cut took effect in July 2010.
Together with other austerity decisions and a EUR20 billion international bailout package, the measure has helped the authorities reduce the country’s budget deficit to around 4.4% of the gross domestic product, from 6.5% of GDP in 2010.