S&P affirms Romania’s BBB-/A-3 ratings with stable outlook

Standard & Poor’s (S&P) affirmed Romania’s credit ratings at BBB-/A-3, with a stable outlook, according to a press release. With this action, Standard & Poor’s keeps Romania’s rating at the same level as Fitch Ratings and Moody’s, just above the non-investment grade. Rating’s confirmation is grounded on comparatively low government and external debt, EU membership and solid economic growth performance. The outlook is stable because S&P expects fiscal and external debt to increase only modestly over the next two years, despite elevated fiscal and external deficits. Also, the large twin deficits should stabilize at somewhat lower levels as the economy cools and the authorities take gradual fiscal steps, according to the Agency’s estimations. It looks like S&P does not see the current government crisis as a factor to affect the country’s ratings.

The Agency expects economic growth to moderate, remaining mainly driven by consumption in 2019 and constrained by the high emigration of skilled workers and the weak population growth. The economic policy environment has stabilized after the adjustment of the bank tax bill and S&P expects the government to tighten the budget after general election next year for offsetting major wage and pension hikes. Yet, lack of structural reforms to address major imbalance sources and weakening external demand will hamper growth, leading to more significant GDP rise moderation as of 2020.

S&P sees the budget deficit remaining at about 3% of GDP this year, sustained by a still strong GDP growth, dividends from state-controlled companies and very probable further slash of public investment. The gap is estimated to jump above that threshold in 2020, when local and general elections are scheduled. Nonetheless, S&P warns that tax collection remains inefficient, adding to the structural fiscal challenges. Fiscal challenges, including persistent deviation from the EU’s MTO are expected to be addressed by the next government that should take over the ruling at end-2020, according to S&P. As for the other deficit, S&P sees the current account gap remaining high by 2022, noting that it is increasingly covered with debt flows, whereas FDI are slowing down and foreign green field investment is scarce due to the rapid wage growth, lack of infrastructure development and political and policy uncertainties.

S&P warned ratings could be downgraded if fiscal and external imbalances persist longer than projected or if the already high inflation is not contained. On the other hand, ratings could be upgraded if institutional framework is strengthened and the government moves on the fiscal consolidation path.

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