Fitch affirms Romania at BBB-. The outlooks remain stable

Fitch Ratings has affirmed Romania’s  long-term IDR (Issuer Default Rating) at ‘BBB-‘ and local currency IDR at ‘BBB’, the outlooks remaining stable, according to press release of the credit rating agency. At the same time, the issue ratings on senior secured foreign and local currency bonds have been affirmed at ‘BBB-‘ and ‘BBB’, respectively.

The Country Ceiling has been affirmed at ‘BBB+’, concurrently, the short-term foreign currency IDR being kept at the same ‘F3’ rating.

The ratings, as well as the stable outlook have been affirmed based on the fact that Romania is expected to meet its general government deficit (GGD) target of 2.2 percent of GDP in 2014 which is in line with the ‘BBB’ median. Fitch foresees a further small reduction in the GGD next year, to 2 percent of GDP, as they await for the Government to take saving measures once the presidential election passes in order to offset the projected 5 percent reduction in the social security contribution rates paid by employers.

Also, Fitch considers it unlikely that Romania will succeed to achieve the mid-term objective (MTO) of a deficit corresponding to 1.4 percent of GDP, meaning 1 percent in structural terms) in 2015, as per the EU Commission’s current request.

“The co-financing of the large portion of EU funds still available to Romania under the 2007-13 budget is likely to put pressure on spending. Fitch would consider a request by Romania to the Commission to postpone the MTO to be neutral for the rating, provided that GGD was reduced in the medium term. This would help to place public debt on a modest downward path following an expected peak of 39.5% of GDP in 2014-15 (in line with the 'BBB' median)”, is explained in the press release.

The economic slowdown recorded by Romania in the first half of 2014 lead to a downward revision of the Fitch’s forecast for 2014 GDP growth from 2.8 percent to 2.2 percent. Even so, the agency predicts an accelerated economic growth (an annual average of 3 percent) in the coming two years partly on investment recovering.

Although upside and downside risks to the rating are balanced, an improved rating could be supported provided there were visible a “higher trend economic growth, in turn leading to greater confidence that Romania is bridging income gaps relative to EU peers and a faster reduction in external debt ratios than Fitch currently expects”.

Romania’s net external debt – 34.4 percent of GDP in 2013, is more than four times higher than the ‘BBB’ median of 7.5 percent, the credit rating agency expecting it to remain above the median in 2016, though a drop by 10 percent is anticipated as the public and private sectors repay liabilities and the current account deficit (CAD) remains moderate.

On the other hand, a major fiscal loosening jeopardizing the stability of public finances, failing to implement key structural reforms or external macroeconomic or geopolitical shocks deteriorating the fiscal and external buffers could trigger negative rating action, according to the said press release.