Last week, on October 8, the rating agency Fitch Ratings confirmed Romania’s sovereign rating at BBB- level with a negative outlook. This is the last level in the “investment” category. Below this level are the thresholds Non-investment grade (speculative), High speculative, significant risks, extremely speculative/imminent default, in default. More precisely, the abyss into which, if we fall, we will reach the level of trust in African countries.

A week after Fitch’s announcement, the largest rating agency S&P Global Ratings confirmed Romania’s BBB- rating with a stable outlook.

It is easy to understand that the reaffirmation of the country’s rating is good news for Romania’s economy, which directly affects Romania’s financial spending.

Two reports, respectively from Fitch and S&P, highlight developments in the Romanian economy, which supported the maintenance of the sovereign rating in the investment grade category

Romania’s economy grew significantly in the first half of 2022 (5.7% year-on-year), despite the indirect effects of the war between Russia and Ukraine, but we expect growth rates to slow significantly over the next few quarters. High inflation, fueled by rising food and energy prices, will reduce disposable incomes, limiting private consumption, which has been a key driver of growth in recent years.

Given the government’s consolidation strategy, S&P also believes that additional fiscal stimulus for the private sector will be modest, weighing on domestic demand from next year.

Foreign direct investment and EU funds are a strong anchor for which Romania’s rating has been confirmed. High nominal GDP growth will help reduce the budget deficit.

S&P Global Ratings optimistically assesses Romania’s public debt

Foreign direct investment and EU funds will help limit public debt to less than 50% of GDP, and interest costs are projected to reach less than 5% of government revenues. As elsewhere, high inflation levels are a challenge for the National Bank of Romania (BNR), which has raised rates by a total of 5 percentage points from January 2021. The National Bank of Romania also supported the exchange rate through rapid interventions, which contributed to maintaining a stable level of the national currency against the euro.

Optimistic forecasts and about the evolution of double defects

Romania’s public deficit will fall below 3% of GDP in 2025 from 5.9% in 2022, supporting the stabilization of net public debt below 50% of GDP.

The trade deficit is growing and will reach almost 9% of GDP this year, but is expected to narrow in the coming years. The monetary policy of the NBR was more moderate than in the countries of the region, and currency interventions kept the exchange rate stable against the euro. Substantial fiscal measures to support the economy will lead to a significant government deficit of 5.9% of GDP in 2022, in line with the government’s target. Support measures include limiting energy prices, which could lead to tax costs of up to 3% of GDP, which will only be partially financed by exceptional taxes on public utilities. However, S&P believes the government will meet its fiscal target, given the implementation of the budget in the first half of 2022, as well as strong nominal GDP growth supporting tax revenues.

While rising interest costs are putting pressure on Romania’s already tight budget, S&P recognizes the market access and liquidity mandated by the government (consisting of a foreign exchange reserve of around 3% of GDP) that provides financing flexibility.

S&P estimates that interest expenses will remain below 5% of revenues, although they will increase over the rating agency’s forecast horizon of 2025.

The most important thing in the S&P press release is the absence of a word that would cause tremors in the government in Bucharest. S&P believes that Romania will not fall into recession in 2023. This is an important nuance and a strong signal sent to the Romanian government.

Fitch, moderate optimism

Fitch expects Romania’s economy to grow by 6.2% in 2022, one of the highest growth rates in the EU, thanks to very strong figures in the first two quarters of the year. Growth was driven by hoarding (which may change in the coming quarters) as well as high private consumption, despite the effects of the war in Ukraine. However, Fitch forecasts that high inflation, rising interest rates and an unstable external environment will lead to a rapid slowdown in GDP growth in the coming quarters, with the economy possibly entering a technical recession in Q1 2023. Due to a weak statistical estimate – due to significant pressure on energy costs, we forecast growth of only 1.6% in 2023, recovering to 3.7% in 2024 thanks to the acceleration of public investment linked to EU funds.

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