Ratings firms downgrade Romania’s outlook to negative

Credit rating agencies Standard & Poor’s, Scope Ratings, Moody’s, and Fitch Ratings have all downgraded Romania’s outlook to BBB− negative. This is the lowest rating recommended for investment. The next rung down, a “junk” rating would be catastrophic for the country, as it would deter investors from putting money into Romania.

The latest credit rating agency to release a financial report for Romania is Germany-based Scope Ratings. The agency’s report points to deteriorating public finances and limited external reserves as the main drivers of the negative outlook, which is balanced by EU membership, high growth potential, and moderate public and external debt levels.

Credit rating agencies Scope Ratings and Moody’s agree that the main drivers of the negative outlook on Romania’s rating are deteriorating public finances and the coronavirus and related policy response. They point to a deteriorating trend over the past few years, plus the 40% hike in state pensions scheduled for September. Combined with the impact of the global health and economic crisis triggered by the novel coronavirus, Scope projects a general government deficit of around 9% of GDP in 2020, resulting in a debt-to-GDP ratio of 45%, which is 10 percentage points higher than in 2019. Upcoming parliamentary elections create additional uncertainties regarding the future path of fiscal consolidation, the report reads.

According to Moody’s projection, the government will have lower revenues and higher public spending in 2020, which will push the deficit to 6.7% of GDP, up sharply from an initial forecast of 3.6%. In addition, the pandemic situation has worsened the trend, and public debt should approach 50% of GDP in 2023, according to Moody’s scenario. More adverse scenarios point to a stronger increase in public debt to above 60% of GDP in 2023, the credit rating agency writes.

In mid-April, Fitch Ratings revised Romania’s outlook from stable to negative. The agency expects the general government deficit to increase to 8% of GDP in 2020. This will narrow in 2021 to 4.2% of GDP, driven in part by a recovery in economic activity, but the government must reduce or cancel the 40% increase in public pensions to reach that projection.

Title image: Pixabay.com

Author: István Fekete