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March 7, 2021

Fitch confirms Romania’s investment grade rating

The rating agency has revised down its forecast for 2014 GDP growth to 2.2 pc from 2.8 pc previously, following weak H1 results.

Fitch Ratings has affirmed Romania’s Long-term foreign currency Issuer Default Rating (IDR) at ‘BBB-’ and local currency IDR at ‘BBB’, according to the statement released by the rating agency recently. The Outlooks are Stable. The issue ratings on Romania’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB-’ and ‘BBB’, respectively. The Country Ceiling has been affirmed at ‘BBB+’ and the Short-term foreign currency IDR at ‘F3’.
Fitch expects that Romania will meet its general government deficit (GGD) target of 2.2 percent of GDP in 2014, little changed from 2.3 percent in 2013 and in line with the ‘BBB’ median. Fitch expects a further small reduction in the GGD in 2015, to 2 percent of GDP, as the government enacts (as yet unidentified) savings measures after the November presidential election to offset a previously announced five percentage point cut in employers’ social security contribution rates.
Fitch expects the adoption of offsetting savings measures to lead to re-engagement with multilateral institutions. The rating agency deems it unlikely that Romania will reach the medium-term objective (MTO) of a GGD equivalent to 1.4 percent of GDP (1 percent in structural terms) in 2015, as the European Commission is currently requesting. “The co-financing of the large portion of EU funds still available to Romania under the 2007-2013 budget is likely to put pressure on spending”, the analysts said in the statement. Fitch would consider a request by Romania to the Commission to postpone the MTO to be neutral for the rating, provided that GGD was reduced in the medium term. This would help to place public debt on a modest downward path following an expected peak of 39.5 percent of GDP in 2014-2015 (in line with the ‘BBB’ median).
Fitch has revised down its forecast for 2014 GDP growth to 2.2 percent from 2.8 percent previously, following weak H1 results. Nevertheless, the agency projects an acceleration in GDP growth to an annual average of 3 percent in 2015-2016, partly due to investment recovering.
“This outcome would help to gradually bridge the gap with the ‘BBB’ median and foster long-term convergence with average EU incomes. Risks appear tilted to the downside, and growth is likely to remain more volatile than for peers, although Romania appears better insulated than other east-central European countries from the fallout deriving from sanctions against Russia, given weak trade ties and lower energy dependence. The Romanian public sector and broader economy are undergoing a process of structural reforms to clear long-standing bottlenecks and inefficiencies, which will take time to complete”, Fitch said.
Nevertheless, the agency rating appreciates the privatisation in June 2014 via initial public offering (IPO) of a majority stake in electricity producer Electrica was a key achievement. Romania’s net external debt, at 34.4 percent of GDP in 2013, is considerably higher than the ‘BBB’ median of 7.5 percent. Fitch expects it to remain above the median in 2016, despite a projected fall by about 10 pps as the public and private sectors repay foreign liabilities and the current account deficit (CAD) remains moderate. About one-quarter of external debt comprises intercompany loans.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are currently balanced. Nonetheless, the following risk factors individually, or collectively, could trigger positive rating action: higher trend economic growth, in turn leading to greater confidence that Romania is bridging income gaps relative to EU peers; faster reduction in external debt ratios than Fitch currently expects.
Fitch assumes that the government will continue to work towards attaining its medium-term objective of a structural budget deficit of 1 percent of GDP. Fitch assumes that the unwinding of extraordinary global monetary stimulus will proceed in a broadly orderly fashion.

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