Fitch places Romania under ‘BBB-‘ rating with stable outlook. The country has a better fiscal position than its peers

Fitch rating agency has affirmed Romania’s long-term foreign and local currency Issuer Default Ratings (IDR) at ‘BBB-‘and ‘BBB’, respectively, a report reads.

Romania’s ratings are underpinned by its marginally better fiscal position than its ‘BBB’ peers, and its relatively positive economic outlook, with GDP expected to grow at close to potential over the next two years, the agency’s analysts note. However, the rating is constrained by structural weaknesses in the economy, „which continue to constrain progress towards more positive developments in the banking sector, business environment and income convergence towards higher rated peers”.

Real GDP growth has performed better than Fitch’s expectations. High frequency indicators on retail trade and industrial production continue to support a resilient recovery in domestic demand, offsetting lower growth in net exports. For 2015 and 2016, Fitch forecasts Romania to grow close to potential, at real growth rates of 2.7 percent and 2.8 percent, respectively. Higher than expected absorption of EU funds by the government could contribute upside risks. On the other hand, a weaker external environment and/or faster than expected deleveraging by Romanian banks could create downside risks.

Recent supply-side factors, i.e. low food and energy prices, have kept inflation at levels below the BNR’s inflation target band (2.5 percent plus or minus 1 percent), rating agency appreciates. „However, in 2H15 we expect a gradual pick-up in demand-pull inflationary pressures, leading to average inflation of 1.1 percent in 2015 and 2.3 percent in 2016,” according to the report. On fiscal finances, Fitch is projecting a slightly weaker revenue and expenditure forecast than the government for 2015. Contrary to the government’s target to meet its medium-term objective (MTO) this year (structural fiscal deficit 1.0 percent of GDP and headline fiscal deficit of 1.2 percent of GDP), Fitch’s forecast is for a headline fiscal deficit 1.5 percent of GDP. We also project general government debt-to-GDP to peak at around 39 percent of GDP.

However, recent government discussions on changes to its fiscal code, which will mean a much looser fiscal stance over the medium term driven by various tax cuts, pose a downside risk on Fitch’s assessment of Romania’s public finances.

As regards the Romanian banking sector, Fitch appreciates it is well capitalised (Tier 1 capital adequacy ratio 15 percent end 2014), and on-going deleveraging efforts by banks have helped bring down the share of non-performing loans in the sector to 14 percent (end-2014) from 22 percent back in 2013. „Nonetheless, risks to Romania’s banking sector are skewed to the downside. A relatively large share of foreign-currency loans (56.3 percent of total loan stock, end 2014) exposes the sector to exchange rate volatilities, as the recent appreciation in the Swiss franc (CHF) has demonstrated for Romanian CHF-denominated debt holders,” according to Fitch.

Romania’s external finances are weighed down by a high net external debt ratio (36 percent of GDP in 2014), which is significantly above the ‘BBB’ median (4.6 percent of GDP), and previous expectations of a material fall in this ratio have not been met.

According to Fitch, Romania’s ratings are constrained by a number of structural weaknesses, including the dominance of industry by inefficient state-owned entities and weak public infrastructure. Structural bottlenecks constrain Romania achieving stronger growth rates, and limit the country’s convergence progress towards western European standards of living.