S&P affirms Romania’s ratings and stable outlook, expects lower economic growth

International rating agency Standard&Poor’s (S&P) affirmed Romania’s 'BBB-/A-3' long- and short-term foreign and local currency sovereign credit ratings with stable outlook, according to a press release issued on August 30.

“The outlook is stable because we expect Romania's fiscal and external debt will increase only modestly over the coming two years, despite elevated fiscal and external deficits. We also expect the large twin deficits will stabilize at somewhat lower levels as the economy cools and authorities take gradual fiscal steps,” S&P motivated.

The agency’s experts expect Romania’s budgetary and external deficits to remain substantial over the next few years, as a result of the Government's procyclical and pre-electoral fiscal stance. However, they don’t see the budgetary deficit going over 3.4% of GDP in 2020.

“Given our view that growth will remain solid (albeit lower), and nondebt external inflows will continue, we don't forecast any major deterioration in public or private debt levels between now and 2023. However, this projection could change if there was either a sharp correction in growth, a much larger fiscal deviation, an exchange rate devaluation, or a combination of the three,” reads the S&P report.

S&P expects Romania's consumption-led expansion will continue in 2019, with headline growth of just under 4%, driven by public and private consumption. This follows average wage increase of close to 14% so far this year.

“By 2020, however, the growth cycle should reverse, with GDP weakening toward 3.0%-3.5% or potentially lower, as fiscal impetus, real wage growth, and external demand all weaken. The timing of the growth cycle is difficult to project, with the risk being that the cycle declines sooner and more forcefully than we currently forecast.”

S&P also expects the Romanian Government to tighten the budget to offset the sizeable increases in pensions in the 2020 and 2021 electoral years. Thus, fiscal measures will no longer help economic growth in 2021. “Romania's growth dynamics remain constrained by the high net emigration of skilled labor, and weak overall population growth. Structural reforms to address these issues appear to be lacking,” S&P also warns.

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