April 2 (SeeNews) - Moody's Investors Service said it has maintained the outlook on Romania as 'stable' and affirmed the 'Baa3' foreign and domestic long-term issuer and senior unsecured ratings.
The affirmation of the Baa3 ratings reflects the country's strong growth prospects, supported by large EU funds and foreign direct investment inflows, Moody's said in a press release on Friday.
According to the rating agency, Romania's real GDP growth, which stood at 2.1% in 2023, will speed up to 3% in 2024 and 3.5% in 2025, underpinned by strong consumption and large public and private investment. However, the fiscal and current account deficits will only marginally improve to 5.7% of GDP and 6.6% of GDP, respectively, in 2024.
The stable outlook maintains a balance between Romania's strong economic trend and the government's ongoing challenges to significantly and sustainably cut the country's high current account and fiscal deficits, Moody's added.
Last month, Fitch Ratings said it reaffirmed Romania's outlook at 'stable' and the local currency issuer default ratings (IDR) at 'BBB-'.
Moody's also said in the statement:
"Key Rating considerations and rationale are summarized below.
Romania's Baa3 ratings reflect the economy's strong growth potential, supported by large European Union (EU, Aaa stable) funds and foreign direct investment (FDI) inflows. High economic strength is balanced by relatively weaker institutions and governance strength and high fiscal and current account deficits, although the latter is mainly funded by stable sources. Romania's government debt burden and debt affordability metrics are stronger than those of rating peers, but both are set to deteriorate gradually in coming years due to high fiscal deficits and rising interest payments.
Moody's expects the Romanian economy to continue to strengthen from a year of comparatively weak growth of 2.1% in 2023, with real GDP growing 3.0% in 2024 and 3.5% in 2025, backed by strong consumption as well as public and private investment. However, the government continues to struggle to bring down the elevated fiscal and current account deficits. Moody's projects a fiscal deficit of 5.7% of GDP in 2024 only marginally improved from 2023, while the current account deficit will only marginally improve to 6.6% of GDP from 7.0% in 2023. The European Commission will this spring likely conclude that Romania has failed to meet its fiscal targets under the Excessive Deficit Procedure but Moody's expects that the government will not announce any additional consolidation efforts until after the parliamentary elections in the second half of 2024.
Romania's "a3" economic strength score reflects the country's strong medium term growth potential as well as its moderate size and income levels. Its "baa3" score for institutions and governance strength balances the relatively weak quality of the institutions with moderate scores for the effectiveness of fiscal and monetary and macroeconomic policymaking. The fiscal strength score of "a3" balances the country's still moderate debt burden and favourable debt affordability metrics against the relatively high level of government debt denominated in foreign currency. The score for Romania's susceptibility to event risk is "ba", driven by political risk stemming from the war between Russia and Ukraine (Ca stable), with which Romania shares a border, as well as heightened tensions in neighbouring Moldova (B3 stable).
The stable outlook balances the strength of the Romanian economy against the government's continued difficulties to durably and materially reduce Romania's high fiscal and current account deficits. Although these do not pose imminent risks to Romania's credit profile, the twin deficits nevertheless represent a source of vulnerability for the sovereign's creditworthiness.
Upward pressure could build on the Baa3 ratings if the fiscal and current account deficits were likely to be materially and durably reduced, thus reducing the vulnerability to shocks, demonstrating institutional effectiveness and stabilizing the debt burden significantly below the peer group median. Continued political stability and improvements to government effectiveness beyond the string of elections to be held in 2024, as well as a reduction in geopolitical risks could also put upward pressure on the ratings. A further strengthening of the economy's growth potential and the government's fiscal sustainability through the adoption of reforms under Romania's Recovery and Resilience Plan (RRP) would also be credit positive.
Downward pressure would build on the ratings if the government struggled to control the twin deficits, resulting in a continued increase of the debt burden and more elevated external vulnerability risks. A failure of the positive trends underpinning our growth outlook for Romania to materialize, such as an inability to implement and absorb the remaining RRF funding, would also be credit negative. An escalation of geopolitical tensions related to the Russia-Ukraine (Ca stable) war, or a deterioration of domestic political stability and policy effectiveness would also put downward pressure on the ratings."