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Standard & Poor's confirmed Romania's rating to "BBB minus / A-3", with a stable outlook
05 March 2018, 5:25 PM
Standard & Poor's confirmed Romania's rating to "BBB minus / A-3", with a stable outlook
By Emea Riga
Standard & Poor's (S & P) has confirmed ratings for the long-term and short-term debt in local currency and currency of Romania to "BBB minus / A-3", the associated outlook being stable, according to a communiqué from the Financial Assessment Agency.
Against the backdrop of continued political volatility, Romania's economy boomed as a result of stimulus measures, resulting in high tax and current account deficits. Even if the external and fiscal flows deteriorate for two years, the moderate debt level provides an important buffer (financial reserve). Therefore, the agency has decided to confirm Romania's rating to "BBB minus / A-3" and to maintain the stable outlook.
In the Agency's view, the stable outlook reflects the expectations that although Romania's deficits will remain high as a result of the government's pro-cyclical budget position, the level of government and foreign debt will only grow gradually over the next two years, hindering major economic slowdown.
S & P might revise Romania's ratings if the Executive is to make more progress with budget consolidation, put the overall government debt firmly on a downward trajectory, and if the governance framework of Romania improves, resulting in more predictable and stable macroeconomic growth .
The agency could also revise Romania's rating if it thinks that policy changes could lead to a significant increase in government deficits, debt and loan costs.
Moreover, S & P might consider negative rating action if external imbalances occur, especially if political uncertainties lead to lower FDI (FDI) inputs, which implies that the deepening of the country's current account will to be largely financed through debts.
The "BBB minus" rating is "investment grade" (recommended for investment).
Romania's ratings are supported by the moderate level of government debt and external debt, against strong prospects for strong economic growth. However, S & P estimates that in 2017 Romania's GDP per capita was just over $ 10,000, the second lowest in the EU. Therefore, the low level of income and wealth constrains the rating, along with the deepening of the budget deficit, weak governmental and institutional efficiency and the continuation of political uncertainties.
In 2017, Romania's economy had one of the fastest rises in the EU, 7%, but efforts to adopt structural reforms remain weak, while fiscal policy is expeditious and focused on consumption.
S & P predicts moderate real GDP growth at around 4.7%. Budgetary constraints will limit the government's ability to boost Romania's economy, while structural factors are beginning to affect expansion. A reduction in the unemployment rate to 4.9% in 2017 indicates a widening of the skilled labor shortage. Moreover, if the rapid rise in wages continues, Romania's hard-won competitiveness may quickly erode, warns the financial assessment agency.
In the medium term, growth rates of the economy will move closer to Romania's growth potential in the absence of structural reform efforts. We estimate an annual average increase of 3.5% over the period 2019-2021, according to the S & P release.
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