Fitch Ratings forecasts Romania’s general government deficit to widen to 8% of GDP in 2020, reflecting a projected sharp fall in revenue as most economic sectors suffer and an increase in expenditure, driven in part by automatic stabilisers, expecting it to narrow in 2021, to 4.2% of GDP.
In a press statement released on Saturday, Fitch has revised Romania’s outlook to Negative from Stable, while affirming the Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘BBB-‘.
“The revision of the Outlook reflects the substantial worsening in Romania´s public finances expected in the short-term as the outbreak and spread of the COVID-19 pandemic aggravates an already weak fiscal position. The combination of a sharp economic contraction and a rise in spending will cause a material widening of the public deficit and a sharp rise in debt in 2020.”
Fitch forecasts Romania’s general government deficit to widen to 8% of GDP in 2020, reflecting a projected sharp fall in revenue as most economic sectors suffer and an increase in expenditure, driven in part by automatic stabilisers. It also reflects a weak starting position, as Romania failed to take advantage of favourable macroeconomic conditions in recent years to improve its headline and structural deficit, with the general government deficit reaching 4.6% of GDP in 2019 (the highest in the EU and versus the BBB median deficit of 1.6%).
It expects the deficit to narrow in 2021, to 4.2% of GDP, driven in part by a recovery in economic activity. “Our forecast rests on the assumption that the government contains the rise in expenditure on non-discretionary items, in particular by reducing or cancelling the 40% increase in public pensions due in September this year approved by the previous government and limits future wage increases. Nevertheless, a complicated political backdrop could hinder such plans and lead to more prolonged deterioration in fiscal metrics. Overall, despite efforts by the current administration (in power since November 2019) to improve fiscal management, Romania´s poor record in fiscal consolidation heightens downside risks to the rating,” warns Fitch.
Fitch’s public-finance projections see the debt ratio rising sharply to almost 45% of GDP in 2020, from 35.2% in 2019. “Although this would still be below the projected ‘BBB’ median of 50%, it would constitute the highest ratio since 1995,” adds Fitch Rating.
In the medium-term, Fitch forecasts Romania’s economy to contract 5.9% in 2020, from a growth of 4.1% in 2019 and a downward revision of 9.2pp since its last rating action in November 2019. Although Romania is less dependent than other countries in the region on services sectors that have been highly affected by COVID-19 (i.e. tourism, transport), Fitch expects a sharp contraction in consumption, investment and exports as global demand collapses and domestic economic activity suffers from lockdown measures and a drop in confidence.
Fitch also expects unemployment in Romania to jump to 8% in 2020, the highest one year increase on record.
” In our central scenario, we expect the disruptions from the COVID-19 pandemic to unwind over the course of this year, with most sectors recovering by end-2020 and job losses moderating. We forecast the economy to expand by over 5% in 2021, driven by strong growth in manufacturing and services exports, a pick-up in investment (both public and private) and a recovery in consumption. Shifting investment priorities by global companies could even benefit some Romanian industries (such as information and communications technology, agriculture) over the medium term. However, we see material downside risk to our short- and medium- term growth forecasts, given uncertainty surrounding the extent and duration of economic and social restrictions,” adds Fitch.
The agency mentions that the main factors that may, individually or collectively, lead to negative rating action/downgrade are: sharp deterioration in medium-term debt sustainability, for example due to failure to offset or delay increases in recurrent expenditure and/or implement a credible medium-term consolidation strategy post-pandemic shock, and weaker medium-term growth prospects, for example reflecting a more pronounced or longer period of economic contraction that leads to permanent sectoral damage.
The main factors that could, individually or collectively, lead to positive rating action/upgrade are: confidence that general government debt/GDP will stabilise over the medium-term, for example due to a post-pandemic fiscal consolidation, and sustained improvement in external debt ratios.
FinMin Citu calls Fitch’s downgrading Romania’s credit outlook warning to populist MPs
The decision by Fitch Ratings, which has revised Romania’s outlook to negative from stable, is a clear warning given to populist MPs, Finance Minister Florin Citu wrote on Saturday on his Facebook page.
“In a statement Fitch confirms what I have said. It is easy to make a big deficit on paper but problems can arise in financing if the deficit is widened without providing sources for its funding. Therefore I have always said that the most dangerous thing for economic stability in Romania at the moment is the populism displayed in Parliament by legislative initiatives voted by all the opposition parties. Projects without any foundation reduce the revenues and increase the government outlays. None of these projects say where the funding for a bigger deficit comes from. There are legislative initiatives that trade in the most cynical way the health of the Romanians and economic stability for a few votes. And the rating agency penalises these cynical populists in the Romanian Parliament, “said Citu.
“As I said, I make sure that all the expenses in the aggregate budget are paid on time. I am in talks with the financial market players every day to make sure that we are financing the deficit at the best costs in the current economic context. Any unfounded increase in the budget deficit may endanger this balance,” said Citu. He added thet the rating agency Fitch also confirms the “V” economy recovery scenario.
Referring to the Fitch decision to revise Romania’s outlook to negative from stable, while affirming the Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) at ‘BBB-‘, Citu said that “given the ongoing crisis in the global economy, affirming the rating shows the agency’s confidence in the measures taken by this government. “