Standard & Poor’s (S&P) Global Ratings revised its outlook on Romania from stable to negative. The rating remains triple B, meaning at the edge recommended for investments, explaining that the Romanian economy has slowed down, while the budget deficit is on the rise.
The expenses engaged by the previous PSD government have forced the incumbent Liberal cabinet to revise the fiscal targets for 2019 and 2020, amid economic slowdown.
“Planned wage and pension increases will contribute to a widening of Romania’s already substantial current account deficit through 2020. While we assume significant fiscal consolidation commences next year, the rigid budget structure and volatile policy environment pose risks to that assumption. We are therefore revising our outlook on Romania to negative from stable, and affirming our ‘BBB-/A-3’ ratings,” says a press release.
According to S&P, the outlook revision reflects increasing risks to Romania´s economic and fiscal stability should policymakers be unsuccessful stabilizing and consolidating Romania’s budgetary stance, including from plans to implement further pension hikes from next year.
S&P warned the rating could be downsized in the upcoming 24 months if:
- Fiscal and external imbalances continue to deteriorate and persist for longer than we currently anticipate, with the absence of fiscal consolidation resulting in higher public and external debt than we currently forecast.
- A lack of economic policy synchronization leads to an overextension of real wages and increased exchange rate volatility, with potential negative repercussions on public- and private-sector balance sheets.
Rationale
Policymakers have increased their projections for the budgetary deficit for 2019 and 2020 to 4.3% and 3.5%, respectively, of GDP from 2.8% and 3.0%, signifying a major deviation from original targets. These revisions largely reflect Romania’s new government’s transparent decision to settle overdue invoices and arrears with suppliers within the 2019 budget while revising downward its expectations for revenue growth.
However, we believe there are grounds to question the realism of the revised budgetary targets over the 2020-2022 period. First, we understand the government intends to stand by the pension hikes mandated in the July 2019 pension law, leading to over 3% of GDP in cumulative pension spending increases in 2020-2022.
Second, in our view, any plans for offsetting budgetary measures are complicated by the upcoming election cycle. Given that the general government deficit will likely exceed the EU’s 3% of GDP Excessive Deficit Procedure (EDP) ceiling this year and next, Romania may not be able to avoid the EDP determined by the European Commission under the Stability and Growth Pact. Romania was last subject to the EDP from 2009 to 2013.
Third, an economic slowdown would weigh on government revenues, leading to further budgetary pressures. Under our base-case macroeconomic scenario, we assume growth remaining close to 3% through 2022.
Despite these concerns, we have decided to affirm the rating given comparatively low stocks of general government and external debt. The affirmation also reflects Romania’s EU membership, which benefits its institutional framework, in our opinion. Constraints to the ratings include low economic wealth, relatively weak administrative capacity, an unpredictable policy environment, and only average monetary flexibility relative to peers.