International rating agency Fitch on April 23 has affirmed Romania's long-term forex debt rating (IDR) at BBB- with a negative outlook, in line with the expectations.

Fitch analysts cited "uncertainty regarding the implementation of policies to address structural fiscal imbalances over the medium term and the impact from the coronavirus pandemic on Romania's public finances."

Fitch's decision came just days after peer agency S&P surprisingly improved its outlook on Romania's BBB- rating from negative to stable.

Notably, the scenarios sketched by S&P and Fitch are very similar, and they have at core the public finances, more specifically the fiscal consolidation promised by the new Government formed after last fall's elections. While S&P notes that the recently instated Government "defused near-term fiscal risks" mainly by rolling back previous costly pension legislation, Fitch sees rather the "weak track record of fiscal consolidation and very high budget rigidities" that constitute "key public finance challenges."

Both agencies converge in identifying measures on the public revenues side as essential. Fitch notes that it expects "more clarity regarding revenue measures in 2022," as Romania will not achieve the fiscal targets without progress in this area.

The "poor record" and the "implementation challenges" are weighted by Fitch more than the "broad commitment to reform and still favorable prospects."

Fitch forecasts a very gradual narrowing of the general government deficit to 8.2% of GDP in ESA terms in 2021 from 9.2% in 2020. But this is in line with the Government's target and consistent with the 7% of GDP public deficit under cash definition.

Fitch forecasts the public deficit to 6.6% of GDP in 2022, which would be consistent with the public debt/GDP increasing to 53.2% in 2022 from 47.3% in 2020, but still below the current BBB median of 57.3% of GDP.

Fitch's forecast is slightly more pessimistic than the official (and the S&P) forecast about the current account (CA) deficit - but this is consistent with the stronger expected GDP growth. Fitch forecasts a modest widening of the CA deficit in 2021-22 (averaging 5.7% of GDP, from 5.2% in 2020) as a recovery in exports is offset by stronger import demand.

But the wider external deficit (the Government sees the CA deficit below 5% of GDP in the medium-term, and S&P forecast the deficit to average 5% in 2021-2024) would be driven by particularly strong GDP growth under Fitch's scenario: 5.8% per year in 2021-2022. This is 1.3pp more than the Government's forecast and in line with the more optimistic independent projections.

iulian@romania-insider.com

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