The negative natural population growth has become significantly more pronounced over the last years, Romania reporting one of the highest values in the EU, while emigration is endemic. Furthermore, emigration also affects highskilled professions, such as those in the healthcare sector. Thus, pressures emerge that contribute to increasing tensions on macroeconomic equilibria and contain potential GDP growth. In order to mitigate risks to financial stability, the Report highlights a number of possible measures to (i) reduce the risk of public debt refinancing, also with the help of measures to further extend the maturity of debt instruments, (ii) align the structural deficit with the medium-term objective, (iii) enhance debtors’ capacity to withstand adverse developments, (iv) ensure the better targeting of the “First Home“ programme from a social perspective, (v) recapitalise the companies with net worth below the required threshold and review the market entry and exit conditions for firms, (vi) improve employment, lower the labour 8  underutilisation rate, also in what concerns regional disparities, and (vii) increase the legislative framework predictability. The National Bank of Romania monitors closely the evolution of risks to financial stability and seeks to mitigate the risk of household overindebtedness through the macroprudential policies it has adopted or prepares to adopt. Moreover, the NBR considers that debtors would be better protected in the medium run if they requested, to a larger extent, to enter fixed interest rate credit agreements.

Moreover, in June 2016-June 2017, the median value of a new housing loan continued to rise, standing 5 percent above that of outstanding housing exposures. This causes indebtedness to become more sensitive to interest rate changes, amplifying debtors’ vulnerability. It is deemed that both the tensions surrounding macroeconomic equilibria and the increase in household indebtedness are growing risks to the country’s financial stability, especially in the context of the changing global market sentiment towards emerging economies, as reflected by the risk premium. These developments can be counterbalanced by a stable and predictable domestic environment, but can also be heightened by a state of uncertainty caused by major, insufficiently prepared and explained changes in the public policy mix. Uncertainty delays investment and increases 6  the preference for liquidity – and the price for the preference for liquidity is the interest rate. When the external environment is uncertainty-ridden and is facing a cycle reversal, it is advisable that the domestic environment should not add to these uncertainties. The pursuit of fulfilling economic policy priorities should not jeopardise financial stability, which is a public good. Another identified systemic risk is the weak payment discipline economy-wide, which reflects in soft budget constraints in the private sector as well. This contributes to the deepening of vulnerabilities that may affect financial stability through inefficient resource allocation, the rise in non-performing loans, the distortion of market signals and the creation of quasi-broad money with negative effects on inflation.