The negative outlook is based on the risks to Romania’s fiscal and external balances over the next 12 months, which are likely to materialize if policymakers fail to produce a credible plan to lower fiscal imbalances.
S&P said it could lower its ratings on Romania if fiscal and external imbalances remained elevated for longer than we currently anticipate, for instance, because of challenges to fiscal policy design after the parliamentary elections of December 6. S&P believes Romania’s funding cost could rise if the incoming government fails to present a credible fiscal policy framework.
The rating agency also said it could revise its outlook to stable if Romania’s incoming government swiftly anchors fiscal consolidation, leading to a stabilization of Romania’s public and external finances.
Despite deteriorating in 2020, Romania’s government and external debt stocks remain moderate. Moreover, we anticipate that the government that assumes office after the December general election will reduce fiscal imbalances.
“We 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. The December parliamentary elections will be key to providing visibility on the medium-term trajectory of public finances. The implementation of a balanced and credible fiscal agenda will be crucial to support the economic recovery and maintain financial market confidence,” according to the rating agency.
S&P projects that Romania’s economy will contract by 5.2% in 2020 before rebounding by 4% in 2021 and EU funds absorption will be key to aiding economic rebalancing, although implementation risks remain.
“We estimate 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 the second quarter, 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. We project Romania’s economic activity will recover in 2021, with real GDP growing by 4%. However, we anticipate that the economy will return to its 2019 level only by 2022,” the rating agency also said.
S&P said the contracting economy, combined with pandemic-related stimulus, falling fiscal revenue, and another bout of increases to social spending (pensions and child care allowances) will widen Romania’s budgetary deficit this year. For 2020, we estimate that Romania’s fiscal deficit will be about 9.2% of GDP, including a decline in revenue due to the economic contraction, which will push net general government debt past 40% of GDP. In addition, credit support, in the form of government guarantees on bank lending to small-and-midsize enterprises for working capital and investment purposes, will add a total 1.5% of GDP to the state’s guarantee commitments.
“With spending on wages and pensions now standing at about 90% of tax revenue, Romania’s budget structure is highly rigid. Although it is not part of our base case, if the 40% pension hike were to be implemented, we estimate that spending on wages and pensions alone would exceed government fiscal revenue in 2021. We do not expect the government to tighten fiscal policy through 2021, in a bid to foster economic recovery. However, we believe authorities will seek to adjust the budget’s structural composition, making spending less rigid and improving revenue collection, while steering toward a gradual reduction in the deficit. We project the government deficit will stand at 7.2% of GDP in 2021 and decline to 5.5% in 2022,” it also said.