S&P projects that Romania’s economy will contract by 5.2% in real terms in 2020 and that the fiscal deficit will widen to 9.2% GDP.
Standard & Poor’s Global Ratings maintained Romania’s rating at BBB-/A-3, with a negative outlook, and warned that the country’s economic situation could deteriorate further if policymakers fail to produce a credible plan to lower fiscal imbalances.
Despite deteriorating in 2020, Romania’s government and external debt stocks remain moderate. Moreover, S&P anticipates that the government that assumes office after the December general election will reduce fiscal imbalances. They believe that any incoming administration is likely to continue to provide ample fiscal support to foster economic recovery through 2021. That said, it would have to deal with, and potentially roll back, fiscal rigidities created through previous policy decisions. These include costly hikes to pensions and other social benefits. Policy uncertainty is exacerbated by the confrontational and complex political landscape, which could make it difficult to build a coalition after the December elections.
S&P estimates that Romania’s output will contract by 5.2% in 2020. Although the firm lockdown measures employed over the year took a significant toll on full-year domestic demand, primarily in Q2, the construction sector has recorded solid performance for nine months, partly because Romania maintained its level of public investments. Weak external demand from key trading partners will eat into exports, of which over 20% go to Germany and 10% to Italy. Both countries also face deep recessions in 2020. The forecast remains sensitive to the uncertain epidemiological situation and the possibility of fresh containment measures. S&P projects Romania’s economic activity will recover in 2021, with real GDP growing by 4%. However, they anticipate that the economy will return to its 2019 level only by 2022.
S&P continues to regard Romania’s EU membership as an important policy anchor. Together with the policy choices of the incoming government, the fiscal stimulus forthcoming at the supranational level will be key to shaping Romania’s macroeconomic rebalancing. Romania will be a strong beneficiary of the structural funds designated under the EU’s upcoming Multiannual Framework, alongside the newly created EU Recovery and Resilience Fund (RFF). The grants portion alone under the RFF equals about 6% of Romanian 2019 GDP, and a similar amount in loans is available to unlock access to cheap financing. Should the funds be fully deployed and successfully absorbed, it would help sustain Romania’s growth prospects, facilitating the budgetary rebalancing that we envision in our base case for 2021-2023.
