Fitch maintains Romania’s rating at BBB-, says economic outlook is stable but several risks remain

Fitch Ratings has maintained Romania’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook, according to a statement released last week, but also issued several warnings about Romania’s fiscal policies.  

“Romania’s investment-grade ratings are supported by moderate levels of government debt, and GDP per capita and human development indicators that are above ‘BBB’ category peers. These are balanced against twin budget and current accounts deficits, reflecting pro-cyclical fiscal policy that poses risks to macroeconomic stability, and net external indebtedness that is higher than its rating peers,” Fitch specialists wrote.

The agency also warned about the rising political uncertainty in Romania, with a new minority government coming to power while fiscal and external metrics are weakening, while the country is preparing for two new election rounds in 2020, which further complicates the economic situation. “Vying for voter support could result in political paralysis. Early elections could provide a clearer mandate for reform, but agreeing to them will also prove challenging.”

In this political context, Fitch expects a further gradual weakening of the public finances over the short to medium term.

“The general budget deficit reached 2.6 percent of GDP in January-September 2019 (compared with 1.8 percent, 0.8 percent and 0.5 percent in the same period in 2018, 2017 and 2016, respectively), with expenditure increasing by 15.3 percent yoy in the period on the back of higher personnel, transfers and capital spending. Moreover, the structure of the deficit is increasingly rigid (almost two-thirds of expenditure comprises wages and social transfers) while efforts to increase tax efficiency have been unsuccessful. We believe there is still scope for the deficit to be only slightly above 3 percent of GDP deficit by end-2019 (and therefore avoid the Excessive Deficit Procedure), but this would require ad-hoc adjustments, which will not represent structural improvements in fiscal accounts,” the Fitch report reads.

Read more about

OTP Bank: After the growth slowdown in 2023, this year’s GDP growth could be close to 3%

read more

The agency adds that the fiscal outlook will become significantly more challenging in 2020-2021, due to a weaker macro backdrop and already legislated pension hikes (leading to an annual average pension increase of 24 percent in 2020 and 26 percent in 2021).

“Fitch expects the deficit to widen to 4 percent of GDP by 2021, assuming that some offsetting measures to the pension increase are found (including potentially a delay or moderation of the pension measures, changes to discretionary expenditure, one-off revenue measures). This would push public debt levels to 38 percent of GDP in 2021 (from 35 percent in 2018), still below the current ‘BBB’ median of 40 percent. Failure to put corrective fiscal measures in place constitutes a key downside risk to the forecasts and Romania’s rating. According to the IMF, under a no-offsetting policy scenario, the pension increase would add 3.2 percent of GDP to expenditure by 2022 and could lead to public debt increasing by 20pp by 2024,” they write.

Fitch continues to forecast a gradual slowdown in economic activity over the next two years, although a stronger investment performance in H1 2019 has led the agency to revise its 2019-2021 growth forecasts to 3.5 percent (from 3.1 percent previously and above the current peer median of 3 percent).

“Private consumption will remain the key growth driver in the forecast, albeit at a lesser pace as wages moderate from recent highs (gross average wages rose by 14 percent in January-August). Although volatile, investment will be supported by rising EU fund absorption, as was the case in the previous financing cycle.”

The agency also notes that external dynamics represent the main downside risk to growth: “Weaker external demand, particularly in Germany (Romania’s main trading partner) has had a clear negative effect on overall export performance and in industrial sector activity. Industrial output has declined since March in yoy terms, with the August print (latest available data) the weakest in almost nine years. A more pronounced or prolonged deterioration could start to spill over to other segments, contributing to further GDP slowdown.”

Fitch experts say that risks of sharply higher inflation in Romania are low, and that trends suggest a gradual easing of inflation in the coming quarters. However, this will depend in part on adjustments to administrative prices. Fitch currently expects inflation to average 3.4 percent in 2020-2021, within the upper limit of the National Bank of Romania inflation target (2.5 percent plus minus 1.0 percent).