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June 2, 2023
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Fitch Revises Romania’s Outlook to Stable; Affirms at ‘BBB-‘

Fitch Ratings has revised the Outlook on Romania’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at ‘BBB-‘. The announcement of the rating agency was issued on Friday, March 24.

As communicated in the press release, the rating is based on the following:

Public Debt Stabilising: Public debt/GDP stabilized at nearly 49% of GDP in 2021-2022. Fitch projects it will remain broadly flat over the medium term in our baseline scenario, below the current ‘BBB’ median of 56%. In the experts’ opinion, the nominal solid growth of the economy, partly due to the economic recovery and partly due to the high GDP deflator, and reforms from recent years that have eased fiscal rigidities and enhanced revenue-raising capacity will compensate for relatively high budget deficits.

Gradual Fiscal Consolidation: The budget deficit in 2022 is estimated to have closed at around 6.3% of GDP. Fitch’s fiscal projections are slightly above official ones, with a budget deficit of 4.6% of GDP in 2023 and 4.0% in 2024. The experts expect narrowing the budget deficit will stem from higher revenues supported by tax reforms, while the expenditure/GDP ratio will remain broadly stable.

Reduction in Downside Risks: Romania’s credit fundamentals have been relatively resilient to shock from the Ukraine war and the subsequent energy crisis in Europe. The economy grew by 4.5% in 2022, and growth momentum was maintained through 4Q22, in contrast to the marked slowdown in the eurozone, Romania’s key trading partner. GDP is almost 7% higher than its pre-pandemic peak, one of the strongest performances among EU members. External finances have also been relatively resilient, with international reserves rising EUR10.1 billion over the past 12 months to EUR57.7 billion in February 2023, reflecting stable FDI, high EU fund flows, and ample market access.

Greater Political Stability: Fitch considers that the grand coalition of three ruling parties (Social Democratic Party, National Liberal Party and Democratic Alliance of Hungarians in Romania), which was formed in November 2021, has made progress on its fiscal consolidation and economic reform plans, and the experts have somewhat greater confidence that relative policy stability will be maintained. This contrasts with previous years of short-lived governments and significant competition between the major parties, often with negative consequences for public finances.

At the same time, Fitch warns about the current account deficit but offers a positive perspective:

The current account deficit (CAD) was EUR26.5 billion, 9.3% of GDP, compared with 7.2% in 2021 and 4.9% in 2020. Romania’s budget and the CAD are significantly higher than the peer median, underpinning the twin deficit problem. The deterioration of the CAD is due to a combination of factors, including the terms of trade shock in the energy sector and the high import content of investments. Notwithstanding the high CAD, Romania faced no external financing pressures, underpinned by the significant increase in international reserves. The exchange rate has been broadly stable against the euro.

We forecast a narrowing of the CAD in 2023-2024, consistent with a fiscal consolidation path and a gradual export recovery. Nevertheless, Romania will continue to have one of the largest CADs in central and eastern Europe and in the ‘BBB’ category, reflecting in part competitiveness challenges.

Fitch Ratings report on Romania

This is good news for Romania; the economy could grow more quickly in 2023-2024, and foreign investors would undoubtedly consider more investments there.

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