The stable outlook balances economic risks from the Russia-Ukraine conflict, namely surging inflation and more adverse economic developments in Romania’s main trading partners, as well as high twin deficits against the buffers provided by its still modest stock of external and government debt and incoming EU transfers, S&P said in a statement on Friday evening.
“We anticipate that commitments under the EU’s Recovery and Resilience Facility (RRF) will continue to anchor authorities’ commitment to political reforms and fiscal consolidation,” the global ratings agency added.
S&P Global Ratings expects real GDP growth in Romania to moderate to about 4% over 2023-2025, compared with close to 6% in 2021-2022, as the recovery in demand following the Covid-19 pandemic wanes and high inflation curbs consumption growth, at least in the near term.
The stability of the country’s energy supply is supported by a substantial share of domestic production. Although the country’s fiscal and current account deficits will remain high in 2022, S&P expects them to decline from 2023 onward due to the government’s consolidation efforts, coupled with lower domestic demand growth.
S&P also said it could lower the ratings over the next two years if the Romanian Government’s medium-term fiscal consolidation efforts prove insufficient, failing to sustainably reduce deficits below 4% of GDP, or if the government’s financing costs increase beyond its expectations; or financing for Romania’s twin deficits were to be increasingly oriented toward debt-creating external flows, perhaps due to lower-than-expected inflows of EU funds.
It also said it could raise the ratings if it saw evidence that Romania can sustain high economic growth, while the current account deficit (CAD) and government’s fiscal deficit narrow, indicating the economy’s strengthening productive capacity.
“Romania’s economy grew strongly in first-half 2022 (5.7% year on year), despite the Russia-Ukraine war’s indirect effects, but we expect growth rates to decrease substantially over the next few quarters. High inflation, buoyed by rising food and energy prices, will cut into disposable incomes, limiting private consumption, a key growth driver in recent years. Given the government’s consolidation strategy, we also believe further fiscal stimulus to the private sector will moderate, which will weigh on domestic demand from next year. Over 2023-2025, we believe Romania’s economic development will be highly contingent on the execution of EU-funded investments. The country has EU grants of 25%-30% of GDP available to it under the RRF and the previous and current Multiannual Financial Framework (MFF)”, S&P said in its statement.
“We expect strong domestic demand, rising import prices, and primary income outflows will push the CAD beyond 8% of GDP this year, the highest level since 2008. However, nondebt-creating inflows on the capital and financial account, namely in the form of foreign direct investments and EU funds, will cover a significant share (close to 60%) of these deficits. We also expect CADs will decrease through 2025 as domestic demand moderates, partly due to the government’s fiscal consolidation plans. High nominal GDP growth will support the moderation in fiscal deficits. This will help contain government debt, net of liquid government assets, at below 50% of GDP and interest expenditure at below 5% of government revenue. As elsewhere, the high inflation levels pose a challenge for the National Bank of Romania (NBR), which has raised rates a cumulative 5 percentage points since January 2021. We continue to classify the exchange rate regime as a managed float. Foreign currency interventions by the NBR remain moderate and have helped keep the leu broadly stable vis-a-vis the euro. Further supporting the ratings are Romania’s continued access to external financing in difficult market conditions, together with the benefits from the country’s EU membership, which constitutes a key policy anchor and benefits the institutional framework,” the statement also reads.
On October 7, 2022, Fitch Ratings affirmed Romania’s long-term foreign and local currency issuer default ratings (IDR) at ‘BBB-‘, with a negative outlook. The rating is underpinned by EU membership and EU capital flows that support external and macro-stability, and GDP per capita, governance and human development indicators that are above ‘BBB’ category peers, Fitch said at the time.