Fitch Ratings reconfirmed the rating of the Romanian government debt to BBB- / F-3

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By Edwig Ban
Fitch Ratings on Friday reconfirmed the ratings for long-term debt in local currency and currency of Romania at “BBB minus”, the associated perspective for both ratings as a stable one, shows in a statement of the financial evaluation agency.
The country ceiling of Romania was confirmed at “BBB plus”, and the short-term rating in local currency and currency was confirmed at “F3”.
The investment grade ratings attributed to Romania are supported by the moderate level of public debt, and the indicators on GDP per capita and human development, which are higher than other “BBB” states. These are in spite of the budget deficit and the current account deficit, which present risks to macroeconomic stability, and the degree of external debt, which is higher than in other “BBB” states, Fitch said.
“In the current political context, Fitch’s baseline scenario indicates a further gradual weakness of public finances in the short and medium term. The general budget deficit reached 2.6% of GDP in January-September 2019 (compared to 1.8% , 0.8% and 0.5% of GDP in the same period of 2018, 2017 and 2016 respectively), and the expenses increased at an annual rate of 15.3% in the first nine months of this year, following the personnel expenses higher, transfers and capital expenditures. Moreover, the deficit structure is increasingly rigid (almost two thirds of expenditures represent salaries and social transfers) while efforts to increase the efficiency of tax collection have not been successful, the press release of the financial evaluation agency is shown.
Fitch argues that the deficit is still likely to be slightly over 3% of GDP by the end of 2019 (and thus avoid the excessive deficit procedure), but this would require ad-hoc adjustments, which would not represent a structural improvement of financial accounts.
The fiscal perspective will become significantly more difficult in the period 2020-2021, taking into account the macroeconomic background and the increase of pensions, already included in the legislation (which will lead to an average annual increase of pensions of 24% in 2020 and 26% in 2021) . Fitch expects the deficit to deepen to 4% of GDP by 2021, estimating that measures are found to offset the increase in pensions.
This would bring the level of public debt to 38% of GDP in 2021 (from 35% of GDP in 2018), still below the average level of 40% of GDP, of “BBB” states.
Failure to adopt corrective fiscal measures will pose a risk to Romania’s rating, Fitch warns.
The current account deficit remains under pressure due to weak external demand and solid growth in imports, following expansionary fiscal policies. Fitch expects the deficit to remain at about 5% of GDP in 2020-2021, if no further fiscal deterioration will occur and if external demand will gradually recover by 2021.

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