Erste says fiscal slippage keeps Romania’s rating at risk

The Romanian sovereign debt remains in good demand, but the twin deficit correction taking longer than previously expected puts the country’s rating at risk, Erste Research concludes in its most recent Macro Outlook for the country, which also confirms the broad concerns about the imminent fiscal slippage to be addressed (for electoral reasons) no sooner than 2025.

The 5%-of-GDP deficit target for 2024 is “virtually unreachable” after the 3.4%-of-GDP fiscal gap reported by the media for January-May, the report reads.

However, Erste analysts are quite on the optimistic side, projecting the public debt-to-GDP ratio under the 50% benchmark at the end of this year (49.6%) as well as one year later (49.6% as well).

The twin deficit correction is likely to take longer than expected, according to Erste analysts, who warn that this keeps the rating outlook at risk for a change to negative, especially if either the fiscal execution or nominal GDP growth disappoints vs. the baseline (2.6% growth this year and 3.9% in 2025) and subsequently the debt-to-GDP ratio outlook shifts higher.

Erste’s models show that the 10Y ROMGBs yield is currently trading around fair value (7%).

The Austrian bank’s analysts see scope for a steepening of the ROMGBs yield curve, with the 10Y versus 2Y spread fair value estimated at above 100bp, mainly driven by the expected decline in front-end yields.

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