March 29, 2023

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Fitch confirmed Romania’s rating at “BBB minus”, with a negative outlook

Fitch Ratings has confirmed Romania’s sovereign rating at “BBB minus” with a negative outlook, this being the last note in the “investment-grade” category (recommended for investments), according to a press release from the financial evaluation agency.

Romania’s “BBB minus” rating is supported by its membership in the European Union and capital flows from the EU that support investments and macrostability, and GDP per capita, indicators on governance and human development, which are above those of other states that benefit from a “BBB” category rating. But these are counterbalanced by a budget deficit and a current account deficit that are higher compared to the deficits of other countries, by low performances regarding budget consolidation and high budget rigidities, and a relatively high net external debt position, Fitch assesses.

The negative outlook reflects the risks of negative evolution caused by the war in Ukraine and the energy crisis in Europe on Romania’s economic, fiscal and external performance, aggravated by the much weaker growth prospects of the euro zone and the external financing conditions which are much more difficult than at the time the previous rating analysis in April. These risks are compounded by competing policy objectives that underlie persistent macroeconomic imbalances. The negative outlook also reflects the continuing uncertainties regarding the implementation of policies aimed at combating structural fiscal imbalances in the medium term, despite this year’s progress, according to the financial evaluation agency’s statement.

Fitch forecasts a reduction in the fiscal deficit in 2022 to 6.4% of GDP, broadly in line with budget targets, following solid performance on the revenue side. Spending growth was more subdued following moderate increases in pensions and wages, but began to accelerate, leading to negative effects on the prices of goods and services and additional support measures.

The agency expects a more difficult fiscal environment in 2023, amid slower growth and demand for higher spending, which could reduce fiscal transparency. So far the energy support schemes, which include electricity and gas caps for households and to a lesser extent for businesses, are planned to be financed from exceptional taxes, with a limited impact on the budget, but it cannot be ruled out more direct support.

Fitch expects the deficit to decline to 5.5% of GDP in 2023 and to 4.7% of GDP in 2024, particularly following the gradual improvement in revenue collection, in line with the fiscal reform approved in the second quarter of 2022 to reduce gaps and the increase of some taxes. The reforms in the pension and salary schemes (expiring next year according to the commitments in the PNNR) are essential for ensuring fiscal sustainability in the medium term, as well as for the continuation of EU funding support, according to the statement of the financial evaluation agency.

There is a continuous commitment of the authorities to implement these reforms, but they will prove costly from a political point of view, as Romania has a poor record in approving structural fiscal reforms. Overall, Fitch sees continued risk of fiscal slippage, including potential for additional spending ahead of the 2024 election cycle.

Extremely high nominal growth will largely offset the cost of interest and still high primary fiscal deficits, with a level of public debt as a percentage of GDP expected to remain on average at 49.5% in 2022-2024 (compared to the current level average of 55.5% of countries in the category “BBB”). Romania faces difficulties related to financing, taking into account the global risk aversion and the high financing needs. Although the need for financing should moderate to some extent in 2023-2024 (from almost 11% of GDP in 2022), it will still require significant external issues (of approximately 8-10 billion euros) and dependence on internal market. Loans from the Recovery and Resilience Facility and other multilateral support will help reduce some pressures, Fitch believes.

A stronger-than-expected deepening of the trade balance led Fitch to forecast a current account deficit of 9.9% of GDP in 2022 (the highest among “BBB” and EU countries).

According to Fitch, the economy is expected to register an advance of 6.2% in 2022, one of the highest growth rates in the EU, thanks to the solid performance in the first two quarters of the year. The increase is driven by the build-up of stocks (a development that could change in the coming quarters), but also by solid private consumption, despite the war in Ukraine. However, the agency expects high inflation, interest rate hikes and a weaker external environment to lead to a rapid slowdown in GDP growth in the coming quarters, with the economy possibly entering a technical recession in the first quarter of 2023. The pressures of the substantial cost of energy led Fitch to forecast an advance of the economy of only 1.6% in 2023, and a recovery to 3.7% in 2024, stimulated by public investments linked to European funds.

The near-term macroeconomic outlook is affected by significant downside risks, particularly from the impact of higher energy costs in Europe. Romania is one of the countries least exposed in Central and Eastern Europe (CEE) to energy trade with Russia, having one of the largest domestic gas production capacities in Europe. This, combined with the filling of storage capacities, means that in the coming months the risk of interruption of the gas supply in winter is low.

Source – Agerpres

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