Scope Ratings sees Romania’s score threatened by fiscal and BoP risks
German rating agency Scope Ratings affirmed, on June 16, Romania's long-term issuer and senior unsecured debt ratings at BBB-/negative.
The score is in line with that of the other three major international agencies.
Besides the fiscal slippage generally expressed as a concern for Romania's macroeconomic outlook, Scope is also worried about the limited official reserves. As Romania maintains its limited reserves to address potential outstanding foreign currency debt in a more stressed environment, the scope of monetary policy action available to support the domestic economy remains narrow.
Under Scope's assessment, the negative outlook is a result of the 'public finance risk' and of 'external economic risks.' While foreign exchange reserves covered 77.3% of short-term liabilities by remaining maturity at the end of March, the current crisis has exposed Romania to higher exchange rate risks and risks of sudden capital outflows.
The gross reserves declined to 16.3% of GDP in 2019 from 21.9% in 2014. Meanwhile, the current account deficit widened to 4.6% of GDP in 2019, from -0.2% in 2014. On the upside, the affirmation of Romania's BBB- investment-grade ratings considers the issuer's multiple credit strengths, such as EU membership with resulting access to investment funds and lender-of-last-resort financing, the economy's robust growth potential despite the health crisis, and the moderate public and external debt levels.
A lack of fiscal consolidation, exchange rate depreciation and/or shrinking official reserves and a weakening in support from European institutions are the three causes that could result in a downgrade - that would put Romania in the junk category - over the next 12-18 months, according to Scope analysts. Improvements in the three areas could result in a stable outlook.
Scope expects an economic contraction of around 4% in 2020. The resulting tax revenue losses and increased fiscal expenditure in preventing large-scale job loss and bankruptcies dominate this year's budget with Scope's 2020 deficit projection reaching around 9% of GDP.
Despite the expected strong economic recovery in 2021 (+6.8%), longer-term growth potential remains constrained by the considerable skill mismatch in the labor market and relatively low absorption of EU funds.
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