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Fitch reaffirms Romania's rating at 'BBB-', outlook stable
Fitch Ratings has affirmed on Friday Romania's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively, with stable outlooks, the rating agency said in a release.
Romania's country ceiling was affirmed at 'BBB+' and the short-term foreign- and local-currency IDRs were affirmed at 'F3'.
"Romania's investment-grade rating is supported by moderate levels of public debt, and GDP per capita and governance indicators that are in line with 'BBB' range medians. However, pro-cyclical fiscal loosening and a rapid increase in wages in excess of productivity growth pose risks to macroeconomic stability," Fitch notes.
The expansionary fiscal policy has weakened Romania's public finances, note Fitch experts, who estimate that the general government budget deficit was 3 pct of GDP in 2017, unchanged from 2016, but worse than the 0.8 pct deficit in 2015. However, fiscal performance in 2017 was flattered by very strong economic growth, which the agency does not believe can be sustained. The budget target was only achieved by implementing half of planned capital spending. Tax cuts have decreased Romania's revenue-to-GDP ratio to one of the lowest in the region, while step increases in minimum wages, public sector salaries and pensions have raised underlying expenditure, Fitch argues.
For 2018, Romania targets a headline fiscal deficit (ESA 2010) of 2.96 pct of GDP. In Fitch's view, optimistic projections for economic growth and revenue, and the lack of impact assessment on discretionary expenditure measures, means the agency forecasts a wider deficit of 3.4 pct of GDP. Fiscal pressures will come from additional tax cuts and increases to wages and pensions.
According to the European Commission, Romania's structural fiscal deficit is estimated to have reached 3.3 pct of GDP in 2017, widening 3 percentage points in two years. The 2018 budget will result in further deterioration, contrary to national and EU fiscal rules, leaving Romania at risk of re-entering the EU excessive deficit procedure, which it has only exited it in 2013.
Romania's debt/GDP ratio increased to 38 pct at the end of 2017 from 37.6 pct in 2016, according to Fitch's estimates, although it remains below the 'BBB' range median of 40.9 pct.
Economic growth is estimated by the rating agency to have accelerated to 6.8 pct in 2017, the fastest in the EU, from 4.8 pct in 2016. As the magnitude of fiscal stimulus fades, an economic slowdown is projected for 2018-2019, with Fitch forecasting average real GDP of 3.6 pct.
The National Bank of Romania (BNR) increased at its January 2018 meeting, the key monetary policy rate to 2 pct from 1.75 pct where it had been since May 2015. The rate hike follows two months of higher-than-expected inflation in October and November 2017, when inflation moved within the upper bound of BNR's 2.5 pct +/- 1 percentage point target, increasing to 2.6 pct and 3.2 pct, respectively, from 0.1 pct back in January 2017. Fitch forecasts an average inflation of 3 pct in 2018, anticipating further rate hikes this year.
The stable outlook accompanying the 'BBB-' rating reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are: persistent high fiscal deficits leading to an increase in government debt/GDP; and an overheating of the economy that poses a risk to macroeconomic stability. Conversely, the main factors that could, individually or collectively, trigger positive rating action include reduced risks of macroeconomic instability, the implementation of fiscal consolidation that improves the long-term trajectory of public debt/GDP, and sustained improvement in external finances.