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Sep 11, 2023 16:45 EEST
September 11 (SeeNews) - Fitch Ratings said it reaffirmed Romania's outlook at 'stable' and the local currency issuer default ratings (IDR) at 'BBB-'.
Romania's economy has slowed down less than the EU as a whole, demonstrating its resilience to the significant negative shocks that the region experienced in 2022, Fitch Ratings said in a statement on Friday.
Romania's 'BBB-' rating is supported by EU membership and related capital inflows that support income convergence, external finances, and macro stability.
Romania's economy will grow by 2.9% in 2023 and by 3.2% in 2024 and 2025, compared with the eurozone growth forecast of 0.8%, 1.4%, and 1.7%, respectively, Fitch said.
In the medium term, the considerable inflows of EU funds, especially the recovery and resilience funds (RRF) and the cohesion funds from the new multiannual (2021-2027) financial framework, will continue to be important drivers of development and investment in Romania, the global ratings agency said.
In March, Fitch affirmed Romania at 'BBB-', with a stable outlook.
Fitch also said in the statement:
"Declining, but Persistent Inflation: Inflation (national measure), has fallen below 10% in July 2023 from its peak of 16.8% in November 2022, but remains well above the National Bank of Romania's 2.5% +/-1 percentage point inflation target. The fall in inflation is driven by favourable dynamics of energy and food prices, while domestic price pressures are more persistent, as signaled by core inflation of 13.1% in July, almost 4pp higher than headline inflation. We expect lengthy disinflation until 2025 in light of inertia. HICP inflation is forecast at 9.3% in 2023, 5.6% in 2024 and 4.2% in 2025, with risks skewed to the upside.
High Budget Deficit: We estimate that the budget deficit will be around 5.5% of GDP in 2023, higher than previously expected and above the 'BBB' median of 2.6%. The fiscal slippage relative to the original budget target is around 1pp of GDP and stems mainly from lower than expected revenue growth. However, the government intends to introduce a fiscal consolidation package in the coming weeks after lengthy domestic and EU negotiations.
This package focuses mainly on revenue-side measures, and some spending adjustments, and the authorities estimate it could yield 2% of GDP. In light of the wider 2023 deficit and notwithstanding the planned fiscal measures, we revised up our 2024 budget deficit projection to 4.8% of GDP, albeit with uncertainty as the fiscal package is not yet finalised. Similarly, the medium-term fiscal path also points towards higher deficits and we do not expect the budget deficit to reach 3% of GDP until at least 2026.
Medium-term Anchor: The government's planned fiscal adjustment supports its adherence to the European framework, including the key fiscal target to bring the deficit below 3% of GDP over the medium term. Romania is the only EU member currently under the Excessive Deficit Procedure, which it entered before the pandemic in 2019 when European fiscal rules were still fully functioning. Although details of the EU fiscal framework are still uncertain, the fiscal conditionality of the RRF grants serves as an important anchor for Romania.
Stable Public Debt: Public debt/GDP declined to 47.3% in 2022 of GDP from 48.6% in 2021, and we project it will remain broadly flat over the medium term, below the current 'BBB' median of 56%. The strong nominal growth of the economy, partly due to the economic recovery and partly due to the high GDP deflator, have broadly offset the impact of the higher deficit path relative to Fitch's prior projections.
Large External Imbalance: The CAD rose to 9.3% of GDP in 2022, from 7.2% in 2021 and 4.9% in 2020 and the 'BBB' median of 1.7%. We forecast it narrowing in 2023-2025 to the 5-7% of GDP range, converge to its pre-pandemic average. Romania will continue to have one of the largest CADs in central and eastern Europe and the 'BBB' category, partly reflecting competitiveness challenges. Notwithstanding the high CAD, Romania has faced no external financing pressures during the global monetary tightening period. This has been reflected in the significant increase in international reserves, and an exchange rate that has been stable against the euro.
Political Stability, Elections in 2024: The grand coalition of the two largest parties (Social Democratic Party and National Liberal Party), which was formed in November 2021, has proven to be stable, and our base case remains that political stability will be maintained beyond the next general elections scheduled by the end of 2024. However, we also see some risks of unfunded electoral promises during the campaign period as 2024 will be a major election year, with local, EU and presidential elections.
Sound Banking Sector: The Romanian banking sector is well capitalised (total capital ratio of 22.8% at end-1H23), liquid and funded with granular local customer deposits (gross loans/ customer deposits of 69% at end-1H23). Asset quality remains resilient to the effects of slowing economy, high inflation and borrowing costs, with non-performing loans stable at 2.6% at end-1H23. Romanian banks' profitability continued to strengthen in 1H23, given the benefits of higher interest rates and despite a slowdown in lending growth, recording a return on equity of 21.1% in 1H23.
We expect banks' profitability has likely peaked, given the gradual downward trend in market interest rates and inflationary pressure on operating expense, but profitability will remain robust.
ESG - Governance: Romania has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Romania has a moderate WBGI ranking at 59.1 percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Fiscal: Persistent, large budget deficits that would lead to an increasing public debt/GDP trajectory over the medium term.
-External: Sizeable deterioration in external liquidity buffers; for example, due to a persistently large CAD and/or reduced capital inflows.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
- Fiscal: Sustained reduction of the budget deficit that supports a firm decline in public debt/GDP over the medium term.
-External: Reduction in external indebtedness and external financing risks, stemming from a structural improvement of the current account position."
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