ECONOMY FINANCE&BANKING

S&P affirms Romania at “BBB-/ A-3”, with stable outlook

Standard & Poor’s Ratings Services on April 8 affirmed its ‘BBB-/A-3’ long- and short-term foreign and local currency sovereign credit ratings on Romania, with a stable outlook, the rating agency said in a statement.

“BBB-” is the agency’s lowest investment grade rating; Romania also has a “Baa3” rating assigned by Moody’s and a “BBB minus” from Fitch.

Standard & Poor’s said that the ratings are supported by Romania’s moderate external and fiscal debt amid reasonably firm growth prospects. On the other hand, the agency mentions that the ratings are constrained by the low GDP per capita (estimated at 9,300 US dollars in 2016) relative to peers, alongside a procyclical fiscal policy and Romania’s weak governance framework, despite important efforts to reduce corruption in recent years.

The stable outlook reflects the balance between the likelihood of Romania’s twin deficits widening on the one hand, and its modest government and external

debt on the other, reads the S&P release.

The agency said they could raise the ratings if Romania’s budgetary consolidation resumes and net general government debt is firmly on a downward trajectory, and public enterprise restructuring is implemented successfully.

Historically – the agency notes – Romania’s fiscal policy has been highly procylical, leading to large swings in demand and the performance of public finances. In 2015, Romania’s economy grew by 3.7 percent, led by domestic demand. Value-added tax cuts and multiple wage hikes have benefitted private consumption, but partly at the expense of public investment. Despite the country’s improved absorption of EU funds last year, S&P estimates that investment in 2016 will still be about 10 percent below the highs seen before the 2008 global financial crisis.

Another related risk to macroeconomic stability is the possibility that wage growth will outpace productivity gains, leading to a loss of external competitiveness. The rating agency notes that labor costs rose by 9 percent in the fourth quarter of 2015 (according to Eurostat’s business economy definition) year on year, more

than in any other country in the EU, albeit from a much lower level. Wage growth during that period was particularly high in education (up 20 percent) and public administration (13 percent) as per Eurostat data. The agency projects that wage growth will likely continue during 2016, given the possibility of further relaxation of fiscal policy ahead of the general elections.

The agency notes that other downside risks to its forecasts could also stem from legislation, which, if applied retroactively, could worsen financing conditions for Romania’s private sector. S&P cites as an example the proposed law on debt discharge, which, it considers, could undermine the recent stabilization of real estate values, slow the recovery of lending growth, and even potentially discourage foreign investment in the nonfinancial sector.

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