Fitch affirms Romania’s rating, but expects fiscal slippage and economic slowdown

International rating agency Fitch affirmed Romania’s long-term foreign currency Issuer Default Rating (IDR) at BBB- /stable on May 10. Fitch has maintained the same rating, which is the weakest in the investment grade category, since July 2011.

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

Specifically, Fitch expects Romania’s GDP growth to average 3.1% per annum in 2019-2020, broadly in line with the current BBB peer median but compared with 4.6% in 2013-18. In contrast, the Government hopes for annual growth rates above 5% in the coming years.

The Government’s ability to contain the budget deficit has reached an end, with the gap exceeding 3% of GDP this year, Fitch believes. It expects the deficit to widen to 3.4% of GDP in 2019. Fiscal loosening could continue in 2020 and beyond, particularly if the Government moves ahead with plans to increase pensions by a further 40% in September 2020 (following a 15% rise approved for September 2019). In the absence of reforms that would boost revenues, Fitch estimates the deficit to widen to 4.0% of GDP in 2020, which would lift the public debt/GDP ratio to 37.9%, from 35.0% in 2018, although this is still slightly below the projected BBB median of 38.8%.

The current account deficit (CAD) widened to 4.5% of GDP in 2018, the highest level since 2012 and compared with the current peer median of 1.0% of GDP. Fitch forecasts further widening of the CAD to 5.5% of GDP in 2020, primarily the result of a wider trade deficit.

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