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S&P confirms Romania at BBB-/A-3, stable outlook; ‘Political volatility overshadows the economic boom’

The financial evaluation company Standard & Poor’s (S&P) maintains Romania’s rating at BBB-/A-3, with a stable outlook, due to country’s moderate external and government debt, amid strong growth prospects.

”However, we estimate Romania’s GDP per capita at just over USD 10,000 in 2017, the second lowest in the EU. Low income and wealth levels therefore constrain the rating, alongside Romania’s widening budget deficit, weak institutional and governance effectiveness, and continued political uncertainty,” S&P said in a statement.

Credit ratings agency forecasts the economy will have expanded by 7 percent, fueled mainly by domestic demand, especially related to consumption, which was supported by double-digit wage growth and tax cuts that boosted disposable incomes. But S&P expects this momentum to be transitory, albeit fairly long lasting, given that the increased absorption of EU funds should bolster solid investment growth in the later years of our forecast horizon through to 2021.

On the other hand, ratings could be lowered if S&P considered that policy reversals could cause general government deficits, debt, and borrowing costs to increase significantly. Moreover, S&P would consider a negative rating action if external imbalances re-emerged, in particular if an uncertain political environment led to lower foreign direct investment (FDI) inflows, implying that Romania’s widening current account deficit would increasingly be financed with debt.

In 2018, S&P forecasts a moderation of real GDP growth to about 4.7 percent. Budgetary constraints will limit the government’s ability to add fuel to Romania’s economy while structural factors start to impede growth. A reduction of Romania’s headline unemployment rate to 4.9 percent in 2017 indicates increasing shortages in skilled labor.

Moreover, if rapid wage increases, which arguably foster convergence and may help reduce net emigration, were to continue, Romania’s hard-won competitiveness gains could quickly erode. In the medium term, GDP growth rates will converge toward those more in line with Romania’s growth potential, absent stronger structural reform efforts.

”We forecast average growth of 3.5 percent annually in 2019-2021. Repeated bouts of political volatility have distracted the government’s attention from reforms that could boost the economy’s long-term growth potential,” the rating agency notes.

S&P also said that Romania’s high fiscal deficit during very rapid economic expansion highlights the country’s vulnerability to potential external shocks. Moreover, it erodes painful fiscal gains achieved during post-crisis years.

Still, the rating agency forecast a deficit of 3.6 percent of GDP in 2018, based on likely lower growth, among other factors. Moreover, S&P believe the government’s strategy, which was previously to slash investment spending to keep the deficit in check, is not sustainable, given Romania’s infrastructure needs.

”Rather than using one-time measures, Romania’s government will need to find ways to close the gap between value-added tax (VAT) owed and VAT collected, which is the widest in the EU, according to data from the European Commission. We believe these pressures on Romania’s budget will persist over our forecast horizon through to 2021,” the statement reads.

S&P also expect Romania’s general government debt will continue to increase. While still modest in an EU comparison, the agency forecasts Romania’s debt could reach 42 percent of GDP by 2021.

The rating agency pointed out that Romania continues to operate a managed float of the Romanian leu under an inflation-targeting regime and expects inflation to ease back toward the upper end of the target range by year-end 2018, although further increases cannot be ruled out.

 

 

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