Standard&Poor’s: Romania ‘BBB-/A-3’ Ratings Affirmed; Outlook Stable

In the latest report on Romania’s economy, the reputable rating agency Standard & Poor’s affirms Romania at BBB-, Outlook Stable. It is actually good news, considering the financial and energy crisis ahead, but also the regional context defined by the conflict next to the country’s borders.

Main predictions of Standard&Poor’s for Romania

S&P expects real GDP growth in Romania to moderate to about 4% over 2023-2025, compared to 6% in 2021-2022. This is a direct consequence of the pandemic, but the agency expects high EU fund inflows to support economic activity.

The stability of the country’s energy supply in the energy crisis is expected to be supported by a substantial share of domestic production.

Also, even if Romania’s fiscal and current account deficits will remain high in 2022, S&P expects them to decline from 2023 onward due to the government’s consolidation efforts and lower domestic demand growth.

Outlook

S&P considers that the stable outlook balances economic risks from the Russia-Ukraine conflict – -mainly in the form of surging inflation and more adverse economic developments in Romania’s main trading partners–and the country’s high twin deficits against the buffers provided by its still-modest stock of external and government debt and incoming EU transfers. Also, S&P experts anticipate that commitments under the EU’s Recovery and Resilience Facility (RRF) will continue to anchor authorities’ commitment to political reforms and fiscal consolidation.

Downside scenario

The agency says it could lower the ratings over the next two years if:

• The government’s medium-term fiscal consolidation efforts prove insufficient, failing to reduce deficits below 4% of GDP sustainably, or if the government’s financing costs increase beyond our expectations; or
• Financing for Romania’s twin deficits was to be increasingly oriented toward debt-creating external flows, perhaps due to lower-than-expected inflows of EU funds.

Upside scenario

At the same time, S&P could raise the ratings if experts see evidence that Romania can sustain high economic growth while the current account deficit (CAD) and the government’s fiscal deficit narrow, indicating the economy’s strengthening productive capacity.

The context of the Russian – Ukrainian conflict

Standard&Poor’s considers that Romania’s economy grew substantially in first-half 2022 despite the Russia-Ukraine war’s indirect impact. The agency expects a 2022 real GDP growth of about 6%, primarily driven by high private consumption.

Meanwhile, high global commodity prices have resulted in surging consumer price inflation (CPI), which experts expect will amount to over 13% in 2022 and almost 9% in 2023, dragging substantially on disposable incomes and, thus, consumption. Also, S&P experts think Romania’s economy will be affected by lower growth in its main trading partners in the EU and diminishing business confidence, which will drag on private sector investments. Positively, the labor market has primarily held up, and unemployment remains close to pre-pandemic levels.

The energy crisis and the Romanian economy

According to Standard&Poor’s, Romania is one of the most self-sufficient countries in energy production. Domestic natural gas production could cover up to 90% of annual consumption. This suggests that Romania has a comparatively low dependence on Russian energy and, therefore, a more favorable position in adapting to disruptions to the European energy supply.

The same experts say that a critical factor determining Romania’s medium-term economic development will be its ability to efficiently use the significant EU financing available under the European Commission’s MFF and RRF framework. EU funds are still available under the 2014-2020 MFF, the incoming 2021-2027 MFF, and the RRF amount to 25%-30% of GDP. The RRF includes €14.2 billion in grants and €14.9 billion in loans, about 10% of the estimated 2022 GDP, and the experts understand that €10 billion of EU funds could be received throughout 2022.