S&P confirms stable outlook for Romania, affirms BBB-/A-3 rating

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On April 7, 2017, S&P Global Ratings affirmed its ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings on Romania. The outlook is stable.

“Romania’s fiscal and external deficits are increasing on the back of a procyclical fiscal stance, although strong nominal GDP growth is keeping government and external debt ratios contained for now. We are therefore affirming our ‘BBB-/A-3’ ratings on Romania,” S&P said in a statement.

The ratings are supported by Romania’s moderate external and government debt, amid reasonably firm growth prospects. The ratings are constrained by low income and wealth levels (we estimate Romania’s GDP per capita at $9,300 in 2017, the second lowest in the EU), alongside a widening budget deficit and Romania’s weak institutional and governance effectiveness, although we note ongoing efforts to reduce corruption in recent years, the release reads.

“Taking into consideration these very accommodative fiscal measures and our growth forecast, which is lower than that of the Romanian government, we expect the deficit to reach 3.6% of GDP this year, against the government’s explicit target to stay below 3% of GDP in the medium term. In the medium term, it could gradually decrease to around 3% by 2020 if the current growth momentum is sustained and no additional deficit-increasing measures are passed. However, we note a significant degree of uncertainty around the fiscal deficit forecast. This is because the government has pledged to implement a host of other measures, such as cuts in social security contributions and a differential reduced personal income tax on the revenue side, and a unified public wage system on the expenditure side. The International Monetary Fund estimates these measures combined could cost the government over 4% of GDP in 2017-2020.

Romania’s sustained fiscal deficits will also lead to a gradual but steady increase in general government debt levels, both in nominal terms and as a percent of GDP. While still low in a European comparison, we forecast gross general government debt will increase to over 42% of GDP by 2020. More than half of Romania’s government debt is denominated in foreign currency, mostly euros, increasing the country’s reliance on access to external markets. We note, however, that the government has increasingly been able to borrow domestically. That said, access to the domestic market may become more difficult because domestic banks have increased their exposure to the government over the last few years, meaning individual institutions could approach internal exposure limits.” (…)

“Overall, Romania’s debt profile has become more robust. Average maturity on Romania’s Eurobonds was eight years and on domestic debt it was 5.8 years at year-end 2016. In addition, the government maintains a cash buffer amounting to at least four months (currently standing at five months) of gross financing needs, which should reduce risks if the external environment becomes more challenging, for instance as a result of a faster rate hikes by the Federal Reserve.

The stable outlook reflects our expectation that Romania’s twin deficits will widen as a result of the government’s loose fiscal stance, while the general government and external debt will remain at modest levels supported by strong economic growth.

We could raise the ratings if Romania’s government made more sustained headway with budgetary consolidation and put net general government debt firmly on a downward trajectory, including by successful restructuring or privatization of public enterprises; and if Romania’s governance framework improved, translating into more predictable and stable macroeconomic growth and government finances.

We could lower the ratings on Romania if we considered that policy reversals could cause general government deficits, debt, and borrowing costs to deteriorate significantly, or if Romania’s external imbalances re-emerged,” Standard & Poor’s says.

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