On Friday, S&P Global Ratings Agency affirmed Romania’s ‘BBB-/A-3’ ratings, with a stable outlook. In this overview, we bring you the highlights of the report.

S&P Global Ratings Agency ‘The Agency’. ‘S&P Global’, affirmed its ‘BBB-/A-3’ long and short-term foreign and local currency sovereign ratings on Romania, with a stable outlook. Starting off with the rationale of the report, S&P Global expects economic activity to slow down in Romania in 2023, to 2.3%. Despite the slowdown, Romania should still record one of the strongest real growth rates across the CEE region.

Delving into Romania further, private consumption remains relatively robust, backed by positive wage growth since March. This is further supported by EU-funded investments. Romania still has EU grants equivalent to over 22% of the estimated 2023 GDP available under the Recovery and Resilience Facility (RRF), as well as the previous and current Multiannual Financial Framework (MFF). In terms of the fiscal deficit, S&P Global expects it at an average of 4.4% of GDP in the 2023-2026 period, compared to 3.6% previously. They still expect the government to consolidate its fiscal position, narrowing the deficit to 3% of GDP by 2026.

Parliamentary elections are scheduled for 2024, which could influence this. Nevertheless, according to the Agency, the Romanian government aims to implement fiscal consolidation measures to increase the revenue base from 2024. Because of this, the Agency expects the deficit to fall to around 5% of GDP in 2024. They expect further consolidation measures over the next few years. When coupled with high nominal GDP growth, this would help stabilize net government debt at around 46% of GDP, as well as keep the interest expenditure slightly above 5% of government revenue through 2026.

At the same time, Romania has one of the highest external deficits in the CEE region, and the Agency expects it to remain at between 6-7% of GDP until 2026. It should be noted that non-debt-creating inflows in the form of EU funds and net FDI will continue to fund a significant share of Romania’s external deficit (app. 60% in the next 3 years). At the same time, the central bank’s international reserves increased to EUR 65bn in September, supported by government deposits from proceeds of recent foreign currency issuances and EU fund inflows.

In terms of inflation, even though it has declined from its peak levels of 14.6% YoY in November, high inflation still poses a challenge to the National Bank of Romania (NBR), which has raised rates by a total of 5.75 p.p. since October 2021, to 7% currently. In terms of the exchange rate, the Agency classifies it as a managed float, meaning that the NBR intervenes in the market to keep the currency exchange rate in a certain range as compared to the euro in the last 18 months.

Moving on to the outlook, according to S&P Global, the stable outlook balances their view of Romania’s high twin deficits against the buffers provided by its modest stock of external and government debt as well as solid growth outlook. They anticipate that Romania’s commitments under the EU’s RRF will continue to anchor the authorities’ political and fiscal reforms.

The Agency also commented on the downside and upside scenarios for future rating actions. Starting off with the downside scenario, the Agency could lower the rating over the next two years if real growth fell significantly short of their current expectations, combined with the government’s medium-term fiscal consolidation efforts proving insufficient to sustainably reduce deficits. On the other hand, the Agency could raise the rating if the deterioration in the government’s debt service costs proves transitory, perhaps due to an improvement in the structure of the debt or if lower inflationary pressure leads to looser monetary conditions. They could also raise the rating if Romania’s economic performance strengthens, supporting higher wealth levels, while the current account deficit and government’s fiscal deficit narrow, indicating the economy’s strengthening productive capacity.

The entire report can be accessed here.

Romanian key indicators (2022 – 2026)

Source: S&P Global, InterCapital Research