Romania’s ‘BBB-’ rating has been on Negative Outlook since April 2020 reflecting a worsening of fiscal imbalances built up in recent years as a result of pro-cyclical policies, and the impact of the Covid-19 pandemic. Although the public debt-to-GDP ratio remains below peers, achieving medium-term fiscal stability relies on the implementation of expenditure and revenue reforms necessary to address structural imbalances.
Fitch has identified the trajectory of government debt/GDP as the key factor for determining the direction in which the Rating Outlook will be resolved.
The Romanian government has plans to tackle fiscal challenges, with key reforms to be proposed within the next 12 months. A stable political backdrop, combined with rising economic momentum and prospects of large EU funds, are supportive factors.
However, implementing Next GenerationEU (NGEU) plans could prove challenging given Romania’s poor record, which in turn could raise policy risks, Fitch said.
A widening current account deficit has raised concerns about deteriorating external competitiveness, although EU funds will serve as a key backstop. A sharper deterioration in the external position could compromise fiscal and monetary policy flexibility, although on its own is unlikely to be a rating driver.
Short-term political risk appears contained but an important test will be whether coalition unity is maintained in the implementation of the planned fiscal and other NGEU-related reforms. Since parliamentary, presidential and local elections will occur in 2024, the political window for reform may be short and any significant setbacks could derail the entire agenda, the ratings agency noted.