March 5 (SeeNews) - Fitch Ratings has reaffirmed Romania's outlook at 'stable' and the local currency issuer default ratings (IDR) at 'BBB-'.
Last year, the Romanian economy experienced a notable slowdown in growth, in line with trends observed across most EU member states. Preliminary data indicates that the annual average growth domestic product (GDP) stood at 2%, a considerable drop from the 4.1% recorded in 2022, Fitch Ratings said in a statement on Friday.
Despite the decline, Romania's GDP growth outperformed the EU average, with a 1% year-on-year seasonally adjusted growth in the last quarter of 2023, compared to the EU's 0.3% growth. Forecasts for 2024 and 2025 anticipate a rebound, with projected growth rates of 3% each year, surpassing the eurozone's expected growth rates of 0.7% and 1.7%, respectively, and aligning closely with the current 'BBB' median of 3.1%.
EU funds, including cohesion and recovery funds, will drive growth and investment, boosting economic potential and accelerating convergence with EU standards, Fitch said.
Romania's 'BBB-' rating is supported by EU membership and related capital inflows that support income convergence, external finances, and macro stability.
Romania's 2023 budget deficit is projected to remain at 6.1% of GDP, unchanged from 2022 and exceeding the 4.4% target. Deficits of 6% and 6.4% are projected for 2024 and 2025, respectively, due to a less favourable starting position and planned pension increases, resulting in a fiscal easing of 1.8% of GDP in 2025.
In September 2023, Fitch affirmed Romania at 'BBB-', with a stable outlook.
Fitch also said in the statement:
"Increasing Public Debt: Fitch forecasts general government debt increasing to 53.3% of GDP in 2025, from 48% of GDP in 2023, but still below the 'BBB' current median of 57.5%. In recent years, strong nominal growth, due partly to higher inflation, helped to contain the debt increase but the upward revisions to our deficit forecasts and a significant slowing in nominal growth has put debt/GDP on an upward path.
Declining Inflation: Inflation declined faster than expected in 2H23 due primarily to favourable food price dynamics . Inflation (national CPI measures) was 6.6% in December 2023, more than 10pp below the peak of 16.8% in November 2022, but still significantly above the National Bank of Romania's 2.5% +/-1pp inflation target. Underlying price pressures are more persistent, as signalled by core inflation persistently above CPI since April 2023. Fitch forecasts HICP inflation to reach 5.1% in 2024 and 3.5% in 2025, with risks skewed to the upside.
Multiple 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 stable, as the country prepares for four elections this year: EU and municipal elections in June and presidential and general elections scheduled by the end of 2024. The pre-election fiscal easing of the governing parties, primarily the unfunded pension increases timed with the general elections, underpin the medium-term fiscal risks.
Modest External Adjustment: The CAD narrowed to an estimated 7% of GDP in 2023, from 9.1% in 2022, but still well above the 'BBB' median of 1.7%. We forecast the CAD to stabilise in the 5-7% of GDP range, consistent with 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 faced no external financing pressures during the global monetary tightening period in 2022 and 2023.
Sound Banking Sector: The Romanian banking sector is well capitalised (common equity Tier 1 ratio of 18.8% at end-3Q23), profitable (annualised 9M23 return on assets 1.9%), liquid and funded with granular local customer deposits (gross loans/ customer deposits of 69%). Asset quality remained resilient to the effects of slowing economy, high inflation and borrowing costs, with non-performing loans stable at 2.6%. We expect profitability peaked in 2023, but should remain reasonable in the near term for larger banks, despite the burden of the turnover tax effective from 2024. The impact of the tax on profitability is likely to be more pronounced for smaller banks.
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.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-Fiscal: Failure to consolidate the fiscal accounts over the medium, leading to a significant increase in the public debt to GDP ratio.
-Macro/External: Evidence of adverse spill-overs to policy credibility, macroeconomic stability, and external liquidity stemming from high twin fiscal and CADs.
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.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Romania a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:
- External Finances: -1 notch, to reflect higher external vulnerability than implied by the SRM, given the large CAD and higher net external debtor and net investment liabilities positions than the 'BBB' current medians.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM."