Fitch Affirms Romania at BBB-, Outlook Stable

FitchRatings has affirmed Romania’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BBB-‘ with a Stable Outlook.

ROMANIA’S RATING: KEY RATING DRIVERS EXPLAINED

Structural Strength and Weaknesses: Romania’s ‘BBB-‘ rating is supported by EU membership and related capital inflows that support income convergence, external finances, and macro stability. GDP per capita, governance and human development indicators are above ‘BBB’ category peers. These are balanced against large twin budgets and current account deficits (CAD) relative to peers, a weak record of fiscal consolidation, high budget rigidities, and a relatively high net external debtor position.

More significant Budget Deficits: The budget deficit (ESA terms) in 2023 is estimated at 6.1% of GDP, practically unchanged since 2022 and well above the initial government target of 4.4%. FitchRatings revised the deficit path over the medium term in light of the less favourable starting position and the significant legislated pension increases in January and September 2024 with an estimated impact of 1.8% of GDP fiscal easing in 2025. Fitch projects general government deficits of 6% of GDP in 2024 and 6.4% in 2025.

Fitch expects meaningful fiscal consolidation over the medium term, which will be helped by re-introducing EU fiscal rules. However, there are significant downside risks, given that the current uncertainties around post-election fiscal plans and the recent fiscal slippage have negatively affected policy credibility.

Increasing Public Debt: Fitch forecasts general government debt increasing to 53.3% of GDP in 2025, from 48% in 2023, but still below the ‘BBB’ current median of 57.5%. In recent years, nominal solid growth, due partly to higher inflation, helped to contain the debt increase. However, the upward revisions to our deficit forecasts and a significant slowing in nominal growth have put debt/GDP upward.

Slowing Economy: The growth momentum of the Romanian economy slowed in 2023, similar to the pattern of most EU members. According to preliminary data, the annual average GDP was 2% in 2023 compared to 4.1% in 2022. Nevertheless, GDP growth is still more substantial than the EU average, illustrated by 1% yoy (seasonally adjusted) growth in 4Q23, compared with 0.3% in the EU. Fitch forecasts 3% growth in 2024 and 2025, compared with the eurozone forecast of 0.7% and 1.7%, respectively, and in line with the ‘BBB’ current median of 3.1%.

The large inflows of EU funds, including the cohesion funds from the new multiannual (2021-2027) financial framework and the recovery and resilience funds, will remain key drivers of growth and investment over the medium term. Beyond the direct demand stimulus, EU funds should also improve the economy’s growth potential, accelerating the catch-up towards the EU level.

Declining Inflation: Inflation declined faster than expected in 2H23 due primarily to favourable food price dynamics. Inflation (national CPI measures) was 6.6% in December 2023, more than 10pp below the peak of 16.8% in November 2022, but still significantly above the National Bank of Romania’s 2.5% +/-1pp inflation target. Underlying price pressures are more persistent, signalled by core inflation persistently above CPI since April 2023. Fitch forecasts HICP inflation to reach 5.1% in 2024 and 3.5% in 2025, with risks skewed to the upside.

Multiple Elections in 2024: The grand coalition of the two largest parties (Social Democratic Party and National Liberal Party), which was formed in November 2021, has proven stable as the country prepares for four elections this year: EU and municipal elections in June and presidential and general elections scheduled by the end of 2024. The pre-election fiscal easing of the governing parties, primarily the unfunded pension increases timed with the general elections, underpin the medium-term fiscal risks.

Modest External Adjustment: The CAD narrowed to an estimated 7% of GDP in 2023 from 9.1% in 2022, but still well above the ‘BBB’ median of 1.7%. Fitch forecasts that the CAD will stabilize in the 5-7% of GDP range, consistent with its pre-pandemic average. Romania will continue to have one of the largest CADs in central and eastern Europe and the ‘BBB’ category, partly reflecting competitiveness challenges. Notwithstanding the high CAD, Romania faced no external financing pressures during the global monetary tightening period in 2022 and 2023.

Sound Banking Sector: The Romanian banking sector is well capitalised (standard equity Tier 1 ratio of 18.8% at end-3Q23), profitable (annualised 9M23 return on assets 1.9%), liquid and funded with granular local customer deposits (gross loans/ customer deposits of 69%). Asset quality remained resilient to a slowing economy, high inflation and borrowing costs, with non-performing loans stable at 2.6%. Fitch expects profitability peaked in 2023 but should remain reasonable in the near term for larger banks, despite the burden of the turnover tax effective from 2024. The impact of the tax on profitability is likely to be more pronounced for smaller banks.

ESG – Governance: Romania has an ESG Relevance Score (RS) of ‘5[+]’ for Political Stability and Rights and the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight of the World Bank Governance Indicators (WBGI) in FitchRatings’ proprietary Sovereign Rating Model (SRM). Romania has a moderate WBGI ranking at 59.1 percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.

Also, Fitch indicates a couple of factors that could, individually or collectively, lead to a negative rating action/downgrade:

–Fiscal: Failure to consolidate the fiscal accounts over the medium, significantly increasing the public debt to GDP ratio.

–Macro/External: Evidence of adverse spill-overs to policy credibility, macroeconomic stability, and external liquidity stemming from high twin fiscal and CADs.