Bucharest, November 4, 2023 – # rbj – Moody’s Investors Service confirmed on Friday Romania’s long-term rating at “Baa3”, with a stable outlook, and the short-term rating was maintained at “Prime-3”, it is stated in a press release of the financial evaluation agency.
The confirmation of the “Baa3” rating reflects Romania’s robust medium-term growth prospects, supported by solid inflows of European funds and foreign direct investment (FDI). It also reflects the debt burden and debt affordability indicators, which remain stronger than other countries with the same rating, although both are expected to deteriorate gradually in the coming years, following a still high level of the budget deficit and rising costs of interest payment. These developments are counterbalanced by the weakness of the quality of the country’s institutions and the susceptibility to geopolitical and external vulnerability risks, the release states.
The stable outlook balances the positive economic trend against the ongoing difficulties of the Government to sustainably reduce Romania’s high fiscal deficit and current account deficit. Although these do not represent imminent risks to Romania’s credit profile, they represent a potential source of vulnerability for solvency, warns Moody’s.
Although Moody’s estimates growth to slow to 2% this year, after two years of solid growth in 2021 and 2022, Romania’s medium-term growth prospects remain solid. Moody’s expects growth to pick up to 3.2% in 2024 and 3.5% in 2025, in line with the agency’s estimate of the economy’s potential growth of 3% – 3.5%.
Romania’s solid growth prospects are supported by the high level of investments with European funds and FDI. The country has allocated a total of around 11% of 2021 GDP in grants and loans from the EU Recovery and Resilience Facility (RRF) to be spent until 2026. And regular funds from the 2021-2027 EU budget will increase in the following years, increasing the total funding from the EU to an average of approximately 4% of GDP per year. Furthermore, Moody’s expects FDI in sectors such as industry and IT to remain at a solid level at around 3% of GDP.
Moody’s also expects the trend of rapid labor productivity growth to continue as Romania continues to catch up with more advanced economies in Europe, and reforms and investments from the EU Recovery and Resilience Facility and other instruments begin to have an impact on growth potential of the economy. Such positive trends will largely dominate the negative impact of fiscal consolidation and labor shortage in the coming years. The reduction of the fiscal deficit will be a gradual process, while the labor force deficit, due to the aging of the population, will be covered more and more with immigrants from countries outside the EU.
Moody’s expects the share of Romania’s debt as a percentage of GDP to stand at 48.2% at the end of 2023, a level similar to that of the last two years and well below the average level of countries with a “Baa3” rating (excluding Romania), of 76.3%.
The share of Romania’s debt as a percentage of GDP was kept relatively stable after the increase registered during the pandemic, in 2020, even if the fiscal deficit remains high. In 2019, Romania entered the excessive deficit procedure (EDP) and targets were set to reduce the fiscal deficit to 4.4% of GDP in 2023, from 6.3% of GDP in 2022. Moody’s expects that it will be achieved only a marginal improvement in deficit data this year, with a deficit of 6.1% of GDP projected in 2023.
The government announced a package of measures in September, including the scrapping of some tax breaks, VAT increases and the introduction of a turnover tax on banks and certain companies, to reduce the deficit in 2024 and beyond. Together with the improvement in growth prospects, the additional fiscal measures that Romania has committed to take, Moody’s expects the deficit to be gradually reduced to 5.3% in 2024 and 4.4% in 2025.
Inflation in Romania fell to 9.2% in September 2023, from a peak of 14.6% in November 2022, following interest rate hikes by the National Bank of Romania in 2022. However, bringing inflation back towards the NBR’s target of 1.5% – 3.5% will remain a significant difficulty in the coming years. Moody’s expects inflation to average 4.9% in 2024.
