German company Scope Ratings has downgraded Romania’s credit rating to BBB- with negative outlook, arguing its decision by continued deterioration of fiscal performance, weak debt trajectory and weakening of the government’s credibility.
The downgrade of Romania’s sovereign ratings to BBB- reflects the following two drivers:
“The wedge between fiscal revenues and expenditures has increased significantly following frequent tax cuts over the past few years. The situation is compounded by Romania’s tax collection system, which is one of the most inefficient in the EU,” Scope said.
German credit analysts point out that expenditures remained broadly stable as a percentage of GDP in Romania, and the budgetary composition has deteriorated, with an increase in consumption and salaries (0.8 percent of GDP) at the expense of much-needed public investment.
Scope estimates “a weak debt trajectory with the public debt ratio projected to return to its 2014 peak of 40 percent of GDP by 2020.”
Given negative structural and primary balances since 2015, previous debt reductions were driven entirely by high economic growth, analysts say.
“Accordingly, the public debt ratio remains acutely vulnerable to growth outcomes which prove lower than government projections – a risk that is also heightened by the late stage of the economic cycle,” Scope indicates.
Given the high share of foreign currency-denominated debt (around 50 percent), a strong depreciation of the RON, leading to higher borrowing costs, would pose considerable risks to debt sustainability over the medium term, according to German rating company.
“The downgrade of Romania’s sovereign ratings reflects changes in Scope’s assessments in the ‘Public finance risk’ category of its sovereign methodology. Romania’s BBB- ratings are supported, however, by the country’s relatively high growth potential, moderate levels of public debt, and resilience in the banking sector,” Scope added.
The affirmation of the negative outlook on Romania’s BBB- ratings reflects “the ongoing political uncertainty and the associated risk of losing institutional credibility with investors given the sustained reluctance of the government to address repeated warnings by the National Fiscal Council and European institutions on unfavourable developments in public finances.”
In Scope’s view, the recent confrontation between the government and EU officials on a rollback of anti-corruption reforms has contributed to a further weakening of the government’s credibility.
“Thus, increasing political uncertainty and deteriorating institutional credibility raise the risk of the sovereign losing the market’s confidence at a time when the economic cycle is turning, exposing risks associated with financing Romania’s fiscal and external imbalances,” Scope says.
Scope Ratings was created in 2002 as a company specialised in the analysis of real assets. In the following years, it added ratings of asset managers and investment products to its portfolio. In 2012, Scope expanded into the credit rating business by merging with PSR Rating.
Romania has the lowest “investment grade” rating at the major three rating companies in the world – Fitch, Moody’s and S&P.