By Jerom Bolt
Standard & Poor’s (S&P) on Friday confirmed Romania’s rating at “BBB- / A-3” for long-term and short-term debt in foreign currency and local currency and maintained a negative outlook, according to a statement from the financial rating agency.
Although the negative economic and fiscal effects caused by the coronavirus pandemic (COVID-19) are expected to increase Romania’s net government debt to 43% of GDP in 2020, S&P estimates that significant consolidation measures will take place after the general elections in 2020.
Romania’s rating outlook remains negative as the agency sees risks to its external balance of payments and budget balance over the next 18 months, if policy makers cannot stabilize and strengthen the fiscal stance following this pandemic-induced recession.
S&P could downgrade Romania’s rating if fiscal and external imbalances remain higher than the agency currently anticipates, and the absence of fiscal consolidation results in a higher level of public and external debt. The rating could also be downgraded if the lack of timing of economic policy increases exchange rate volatility, with potential negative repercussions on public and private sector balance sheets.
S&P could revise Romania’s rating outlook to stable if the government makes progress in anchoring fiscal consolidation, which will lead to a stabilization of the country’s public finances and external position.
Romania’s rating was confirmed by S&P taking into account the low level of external debt. S&P believes that Romania will have the capacity to absorb the level of damage that the agency expects in 2020.
The S&P believes that the negative fiscal effects of the pandemic will provide the government with the political context to reduce the cost of planned pension increases in September 2020. instead of the 40% provided for in previous legislation), which will add about 1% of GDP to the budget deficit in 2021.
Romania has strong market access, which mitigates the risks associated with the high short-term financing needs of the public sector. S&P recognizes Romania’s EU membership as a key political anchor, which benefits the country’s institutional framework and is likely to bring financial support from the extraordinary structural funds allocated for this year.
S&P estimates that Romania’s economy will contract by 5.5% in 2020, after previously forecasting an advance of 3.5%, and expects the Executive to review the planned pension increase this year.
The restrictions introduced to stop the spread of the pandemic will significantly affect domestic demand, especially in the second quarter of 2020, the agency warns. Moreover, weak external demand from key trading partners will significantly affect Romania’s exports this year as a whole, of which more than 20% will go to Germany and 10% to Italy, countries that will face severe recessions in 2020.
Currently, S&P estimates that economic activity in Romania will gradually recover from the middle of this year and in 2021 there will be an increase of 4%.
Romania’s current account deficit will increase, reaching about 5% of GDP in 2020, warns S&P. By 2023, the current account deficit will be around 4% of GDP, following increased demand and a strong recovery in exports in 2021.
Romania’s banking sector, where foreign shareholders predominate, remains solid, according to S&P. This sector entered the turmoil caused by the pandemic from a solid position, with a loan-to-deposit ratio of 72% at the end of 2019, from a peak of 142% in 2010. The system also benefits from the low level of non-performing loans, which has decreased significantly since 2014.
By Jerom Bolt