March 27 (SeeNews) - Fitch Ratings said it has revised Romania's outlook from negative to stable and affirmed the local currency issuer default ratings (IDR) at 'BBB-'.
The change in outlook is due to the stabilisation of the country's public debt, a gradual fiscal consolidation, a reduction in downside risks and greater political stability, Fitch said in a statement on Friday.
Romania's 'BBB-' rating is underpinned by EU membership and EU capital flows that support income convergence, external and macro-stability.
These are balanced against larger twin budget and current account deficits than peers, a weak record of fiscal consolidation, high budget rigidities, and a fairly high net external debtor position, Fitch added.
Fitch's stable outlook reflects relatively resilient external finances - stable FDI, high EU fund flows, and ample market access, with international reserves rising 10.1 billion euro ($10.8 billion) over the past 12 months to 57.7 billion euro in February 2023, the global rating agency said.
The stability is also reflected in Romania's credit fundamentals, which have been relatively resilient to shock from the Ukraine war and the subsequent crisis in Europe. The country's GDP grew 4.5% in 2022, being almost 7% higher than its pre-pandemic peak, one of the strongest performances among EU members.
In October, Fitch affirmed Romania at 'BBB-', with a negative outlook.
Fitch also said in the statement:
"Public Debt Stabilising: Public debt/GDP stabilised at near 49% of GDP in 2021-2022 and we project it will remain broadly flat over the medium term in our baseline scenario, 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, and reforms from recent years that have eased fiscal rigidities and enhanced revenue raising capacity will compensate relatively high budget deficits.
Gradual Fiscal Consolidation: The budget deficit in 2022 is estimated to have closed at around 6.3% of GDP. Fitch's fiscal projections are only slight above official ones with a budget deficit of 4.6% of GDP in 2023 and 4.0% in 2024. We expect narrowing of the budget deficit will stem from higher revenues supported by tax reforms, while the expenditure/GDP ratio will remain broadly stable.
Greater Political Stability: The grand coalition of three ruling parties (Social Democratic Party, National Liberal Party and Democratic Alliance of Hungarians in Romania), which was formed in November 2021, has made progress on its fiscal consolidation and economic reform plans and we have somewhat greater confidence that relative policy stability will be maintained. This contrasts with previous years of short-lived governments and significant competition between the major parties, often with negative consequences for public finances.
Resilient Recovery Despite Lower Growth: A weak external environment and fall in real disposable incomes triggered by high inflation, will temporarily slow growth this year. Fitch forecasts 2.3% GDP growth in 2023 and 3.0% in 2024, well above the eurozone growth forecast of 0.8% and 1.4%, respectively, and in line with the 'BBB' median.
The large inflows of EU funds, including the cohesion funds from the new multiannual (2021-2027) financial framework and the recovery and resilience funds will continue to be key drivers of growth primarily through investments over the medium term. EU funds should also moderately improve the growth potential of the economy, estimated by the European Commission to be around 2.5-3%, accelerating the catch-up towards the EU level.
High, Persistent Inflation: Inflation increased very steeply in 2022 in Romania, as in most European countries. The average 2022 HICP inflation was 12%. Inflation is expected to decline this year, primarily due to base effects in the short run. Fitch forecasts 9.3% annual average HICP inflation in 2023 and 5.6% in 2024, still significantly above the 2.5% inflation target and with risks skewed to the upside.
Monetary Tightening, Policy Uncertainties: The National Bank of Romania tightened monetary conditions gradually as the inflation outlook worsened. The key policy rate increased to 7% in January 2023 from 1.25% in September 2021. Despite the monetary tightening cycle, the monetary conditions are not particularly restrictive as real interest rates have been negative since the pandemic.
The key fiscal anchor for the government is to cut the deficit below 3% of GDP by 2024 to exit the Excessive Deficit Procedure (EDP) that Romania entered before the pandemic, when the European fiscal rules were still fully functioning. As the future of the European fiscal rules are more uncertain following the multi-year suspension, we expect the EDP constraint to be less binding for Romania.
Large External Imbalance: The current account deficit (CAD) was EUR26.5 billion, 9.3% of GDP compared with 7.2% in 2021 and 4.9% in 2020. Romania's budget and the CAD are both significantly higher than the peer median, underpinning the twin deficit problem. The deterioration of the CAD is due to a combination of factors, including the terms of trade shock in the energy sector and high import content of investments. Notwithstanding the high CAD, Romania faced no external financing pressures, underpinned by the significant increase in international reserves. The exchange rate has been broadly stable against the euro.
We forecast narrowing of the CAD in 2023-2024, consistent with a fiscal consolidation path and a gradual recovery in exports. Nevertheless, Romania will continue to have one of the largest CADs in central and eastern Europe and in the 'BBB' category, reflecting in part competitiveness challenges.
Sound Banking Sector: Romanian banking sector is well capitalised (total capital ratio of 21.7% at end-2022), liquid and funded with granular local customer deposits (gross loans/ customer deposits of 71% at end-2022). The banking sector maintains some of the highest exposure to the domestic sovereign among Central and Eastern European countries, with the sector's debt securities portfolio accounting for 22.4% of its assets and largely comprising sovereign bonds.
Given interest rate increases from late 2021, these bonds have been a source of meaningful unrealised losses building up throughout 2022. However, we think the risk that they will be realised is modest, given sector's solid and granular funding profiles, decent levels of cash and withdrawable reserves and moderate durations of these portfolio.
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: Increasing public debt/GDP trajectory over the medium term, for example, due to a deterioration of the fiscal stance and/or a macroeconomic shock.
-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: Increased confidence in a firm decline in public debt/GDP over the medium term, driven, for example, by a sustained reduction of the budget deficit
-External: Reduction in external financing risks, for example, from a structural improvement of the current account position that leads to a decline in external indebtedness, and/or improving external buffers."
($=0.930453 euro)