S&P confirms Romania's rating on a largely sustainable growth scenario

Rating agency S&P affirmed on October 13 Romania's fragile BBB-/stable sovereign rating, keeping the country at the lower end of the investment-grade region.

The bullish underlying scenario published along with the rating action has the Recovery and Resilience Facility (RRF) as a major driver that, besides robust private consumption, will help Romania report one of the strongest real growth rates across Central and Eastern Europe (CEE) this year (2.3%). The rating agency assumes that the government will fully capitalise on its benefits in the future, including by pursuing a further fiscal consolidation package during the super-electoral year 2024.

Nevertheless, S&P confirms the fiscal outlook has deteriorated over the period since the latest country update. It says it has "modestly" increased its projections for Romania's fiscal deficits to 4.4% of GDP on average over 2023-2026, still a significant 0.8pp above the previous 3.6%.

The rating agency remains confident that the RRF will help the country address the twin deficit challenges in the short term thanks to EU grants equivalent to over 22% of the estimated 2023 GDP under the RRF, as well as the previous and current Multiannual Financial Framework (MFF).

At the same time, S&P believes that the RRF will serve in the longer term as a robust anchor for further fiscal reforms needed to address structural issues.

Romania will meet the 3%-of-GDP public deficit requirement in 2026, while the current account (CA) deficit seen at 6%-7% of GDP through 2026 will be financed to a large extent (60%) by non-debt-creating inflows in the form of EU funds and net foreign direct investments (FDI).

The S&P Rating Overview

• We project that Romania's 2023 fiscal deficit will remain high at about 6% of GDP, similar to the previous year. Our expectation of a narrowing deficit has been undermined largely by a shortfall in tax revenue.
• However, we expect stronger private consumption and substantial EU-funded investments will support real GDP growth of 3.6% on average over 2024-2026.
• We also expect the recently announced fiscal consolidation package to support a reduction in the fiscal deficit to 3% of GDP by 2026.
• We therefore affirmed our 'BBB-/A-3' ratings on Romania and maintained the stable outlook.

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