Fitch affirms Romania at ‘BBB-‘ with negative outlook

Fitch Ratings has affirmed Romania’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a negative outlook.

The Negative Outlook reflects uncertainty regarding the implementation of policies to address structural fiscal imbalances over the medium term and the impact from the coronavirus pandemic on Romania’s public finances. The current administration plans a series of fiscal and macro reforms to anchor medium-term fiscal sustainability, but a weak track record of fiscal consolidation and very high budget rigidities constitute key public finance challenges, Fitch says.

Fitch forecasts a very gradual narrowing of the general government deficit to 8.2% of GDP in ESA terms in 2021 from 9.2% in 2020 (the highest in the CEE region), broadly in line with the budget. Stronger revenue growth thanks to solid economic recovery will largely be offset by pandemic-related spending as well as higher investment outlays. Short-term risks are mitigated by the approval of emergency ordinances that have reduced the scheduled pension hike from 40% to 14% in 2021 and frozen public wages and bonuses.

Overall, Fitch sees broad commitment to reform and still favourable prospects that expenditure rationalisation measures will be approved in 2021 despite recent coalition tensions. Fitch also expects more clarity regarding revenue measures in 2022, as without progress in this area the fiscal targets will not be achievable.

Fitch forecats the public deficit falling to 6.6% of GDP in 2022, which would be consistent with public debt/GDP increasing to 53.2% in 2022 from 47.3% in 2020 and still below the current ‘BBB’ median of 57.3% of GDP.

Fitch expects Romania´s economy to expand by an average of 5.8% in 2021-22 (versus the ‘BBB’ peer median of 4.4%), thanks to strong investment momentum and a gradual recovery in exports and private consumption.