Fitch Affirms Romania at ‘BBB-‘, Outlook Remains Negative

Bad news for Romania’s economy. According to Fitch Ratings, Romania remains at BBB- amid regional tensions and galloping inflation, with a negative outlook. In its latest report on Romania’s economy, issued on Friday, April 8, Fitch affirms Romania at BBB- and warns about various risks to its economy.

This deters investors even more in the current regional and international context. An analysis we realized in January this year on the loss of investors’ trust in Romania’s economy seems to have fully predicted the current situation.

Key Rating Drivers in Fitch Ratings’ report

Credit Fundamentals

Fitch considers that Romania’s ‘BBB-‘ rating is underpinned by EU membership and EU capital flows supporting investment and macro-stability. Experts believe these are balanced against a larger twin budget and current-account deficits than peers, a weak record of fiscal consolidation and high budget rigidities, and a reasonably high net external debtor position.

Negative Outlook

The Negative Outlook offered by Fitch reflects continued uncertainty regarding the implementation of policies to address structural fiscal imbalances over the medium term and the impact of the Ukraine war and energy crisis on Romania’s economic, fiscal and external performance.

Heightened Short-Term Challenges

 In Fitch Ratings’ opinion, the Russian invasion of Ukraine represents a significant macro headwind, as it will heighten short-term risks to growth and inflation, and to a lesser extent, to public and external finances. Trade and export links with Russia—as well as Ukraine and Belarus—are minimal (exports to the three countries accounted for only 2.3% of the total in 2020), and unlike other countries in the region, Romania imports only a modest share of its gas from Russia (20%, the is rest domestically produced). However, steep increases in commodity prices, supply-side disruptions and weaker growth in Romania’s main trading partners (mainly the eurozone) will have significant spillovers, heightening short-term risks.

Public Investment Key Growth Driver

Fitch expects GDP growth to slow to 2.1% in 2022 (from 5.9% in 2021), reflecting a slowdown in private consumption and exports. Although the government has put some measures to offset higher energy costs, they will likely be insufficient to prevent a loss of purchasing power. Fitch expects public investment to provide momentum in 2H22, in line with higher absorption of the 2014-2020 Multi-Annual Financing Framework and the Recovery and Resilience Fund (RRF). In 2023 we expect investment dynamics to accelerate further, which, combined with our assumption of normalization of external trade and supply chains, will lift growth to 4.8%.

Inflation Higher for Longer

Fitch forecasts the harmonized index of consumer prices (HICP) will average 10% in 2022 (the highest rate since 2004), with inflation likely to reach double digits in 2Q22 and possibly 3Q22 (from 7.9% in February), reflecting significant pass-through from higher energy and commodity prices as well as second-round effects. The government has placed a cap on electricity and gas prices for households and some companies until April 2023, which should limit inflation pressures somewhat. Unlike other regions, wage growth appears moderate (primarily due to restraint on public wages). Still, tensions are likely to rise as the labour market tightens and employees feel a squeeze on their living standards. Fitch expects inflation to soften to 5.5% in 2023, reflecting base effects.