The government’s planned deficit of 3.6% of GDP for 2020 remains expansionary despite minor adjustments. Pension reforms and a return to fiscal prudence are keys for preventing a further deterioration in Romania’s creditworthiness, says Scope Ratings.
Romania (BBB-/ Negative)’s pro-cyclical fiscal policy stance brought a provisional budget deficit of 4.3% of GDP in 2019, 1.54 percentage points above budget goals. Scope projects this year’s budget to be slightly less expansionary, but still very much dependent on sustained high economic growth.
“The growth projections for 2020 of between 2.7% and 3.7% raise doubts regarding the attainability of this year’s already elevated deficit targets,” says Bernhard Bartels, lead sovereign analyst for Romania at Scope Ratings. “The government’s assumed growth rate of 4.1% exceeds even the most optimistic forecasts, assuming an unchanged rate of elevated domestic demand growth.”
Somewhat slower economic growth conditions come at a time of strained public finances: over the next two years, a 40% pension hike enacted by the previous government will increase public sector expenditures by 0.7% of GDP in 2020 and by 2.7% by 2021. Concurrently, Romania faces record-low tax revenue ratios of around 25% of GDP, driven by a series of tax reductions in the past, and high expenditures on public-sector wages.
“The current liberal minority government led by Prime Minister Ludovic Orban has committed to retaining the pre-programed pension hike for later this year if the economy evolves as expected but has announced substantial changes to be enacted to the fiscal framework at a later date,” says Bartels. “However, the government has not provided greater details on fiscal tightening measures in order to secure votes in elections this year.”
The government aims for snap elections in the summer to benefit from current polling and to save time for needed fiscal adjustments post-elections while a parliamentary majority currently favours elections at the regular date in December 2020. The process in Parliament could also result in another change of government if the formerly ruling Social Democrats (PSD) locate a governing partner.
After the collapse of the former PSD coalition government following the resignation of its ALDE partners last November, which brought the liberals to power, the new government has taken a number of important steps to regain institutional credibility. These include the reversal of a law that effectively decriminalised corruption and the adoption of a bill to cancel the bank tax and a separate levy for energy companies. Scope expects these policy actions to support investment once conclusion of upcoming elections bring better predictability around policy-making.
“The Orban government has also initiated the return to a more co-operative stance with EU officials, who repeatedly prompted previous governments to adhere to common regional rules,” says Bartels. “The looming Excessive Deficit Procedure following budget deficits of above the 3% of GDP threshold since 2019 requires a constructive dialogue with EU authorities in the coming period to come to an anticipated resolution plan.”
Romania’s risks remain balanced by the economy’s high potential growth rate, moderate levels of public debt at around 37% of GDP, and stable financial sector. At the same time, strong consumption and investment growth have led to a continuous increase in its current account deficit to a new high of 5.1% of GDP in 2019. Increasing global risk aversion, combined with weaker investor confidence in Romanian assets, could reduce current international reserve buffers, covering around 5.4 months of imports through 2019.
“Moderate gross government financing needs of around 8% of GDP and the low interest-rate environment curb short-term risks to debt sustainability, while the fiscal framework remains a substantial medium-term challenge for public finances,” concludes Bartels.
Scope’s next scheduled review date for Romania’s sovereign ratings comes on 12 June.
About Scope Ratings GmbH
Scope Ratings GmbH is part of the Scope Group with headquarters in Berlin and offices in Frankfurt, London, Madrid, Milan, Oslo and Paris. As the leading European credit rating agency, the company specialises in the analysis and ratings of financial institutions, corporates, structured finance, project finance and public finance. Scope Ratings offers a credit risk analysis that is opinion-driven, forward-looking and non-mechanistic, an approach which adds to a greater diversity of opinions for institutional investors. Scope Ratings is a credit rating agency registered in accordance with the EU rating regulation and operating in the European Union with ECAI status.