Rating agency Moody’s revised Romania’s outlook from stable to negative on Friday evening, bringing the country’s rating to the last investment-grade level. All three major rating agencies have thus taken Romania to a step closer to “junk” status, meaning a country not recommended for investment, after Fitch made a similar decision in December and Standard & Poor’s in February. A further potential future rating downgrade would cause many investors and their money to evaporate from the country.
A decision to downgrade the outlook could lead to an increase in the interest rates at which the Romanian government borrows on financial markets to finance its deficit, but could also affect investment interest.
Romania already has the riskiest and most expensive government bonds in the European Union, in the context of the largest budget deficit in the EU and political uncertainty surrounding the presidential elections.
The rating agency says that this change in outlook reflects the risk of a lack of further fiscal consolidation, stating that Romania’s fiscal strength may weaken significantly in the coming years. Moody’s Ratings has lowered the outlook on Romania’s credit score, increasing the risk of it being downgraded to junk, as political turmoil complicates efforts to reduce the budget deficit before the resumption of the presidential elections.
Moody’s has cut the outlook on Romania’s Baa3 rating, the lowest level of investment-grade credit, from stable to negative, the credit rating agency said in a statement on Friday, confirming the rating. The move follows similar decisions by S&P Global Ratings and Fitch Ratings in January and December, respectively.
Moody’s warns of a weaker fiscal outlook without additional measures. Romania has widened its budget deficit to levels last seen during the coronavirus pandemic, with the deficit equal to 8.7% of economic output in 2024.
Moody’s said it expects a budget deficit of 7.7% this year, improving only gradually thereafter.
“Absent significant improvements in the fiscal outlook, this risks leaving Romania’s overall credit profile significantly weaker than that of its Baa3-rated peers,” Moody’s said.
“The decision to change the outlook to negative reflects the risk that, absent further fiscal consolidation measures, Romania’s fiscal strength could weaken significantly in the coming years, eroding what has so far represented relative borrowing power compared to similarly rated sovereigns. Based on the policies announced by the government to date, we expect the fiscal deficit to decline from 8.7% of GDP in 2024, but to remain elevated at 7.7% of GDP in 2025 and to improve only gradually thereafter.
Together with a significant downward revision to our growth forecast for Romania, this would lead to a rapid increase in public debt to 59.3% of GDP at the end of 2025 and 62.7% at the end of 2026, from 48.9% at the end of 2023,” the agency argued.
Moody’s also argues that the increase in borrowing requirements and interest costs will also lead to a significant weakening of public debt sustainability parameters in the coming years, with the ratio of interest payments to public revenues increasing from 5.7% in 2023 to over 9% in 2029. The rapid increase in indebtedness also implies an increase in the level of Romania’s outstanding foreign-currency-denominated debt relative to GDP, which increases currency risks for the government.