Fitch rating agency has revised the outlook on Romania's BBB- sovereign rating from stable to negative, citing “the substantial worsening in the country’s public finances expected in the short-term as the outbreak and spread of the COVID-19 pandemic aggravates an already weak fiscal position.”

At the beginning of the pandemic Romania's debt was rated at the lowest investment grade level with a neutral outlook by all major rating agencies, and Fitch was the first to capture the country’s visibly bleaker outlook, specifically the expected deterioration of the public finance metrics. 

Moody's is also expected to publish its rating review on Romania, and a negative revision of the sovereign outlook or even rating (less likely) is expected as well.

The regularly scheduled review date for Fitch's sovereign rating on Romania is May 1, but Fitch analysts said they believe that "developments in the country warrant such a deviation from the calendar."

Specifically, the combination of a sharp economic contraction and a rise in spending will cause a material widening of the public deficit and a sharp rise in debt in 2020 by nearly 10% of GDP to some 45% of GDP, Fitch said.

Finance Minister Florin Citu blamed the parliament for Fitch's outlook change. He argued that the populist laws passed by the Social Democratic Party (PSD)-led majority significantly increase public expenditures while not generating revenues to balance the budget. 

“As the market nearly priced in a one-notch downgrade, in case of outlook downgrade we would expect virtually no reaction, while one notch downgrade (more severe scenario) can cause a limited rise in bond yields (spreads),” Raiffeisen Bank said in a comment.

Fitch expects a combination of sharp economic contraction (-5.9%) and rising spending to propel the public sector deficit to 8% of GDP this year, above the 6.7%-of-GDP revised deficit target planned by the government. In turn, this would push up the public debt by 9.4% of GDP to 44.8% of GDP — still below the projected BBB median of 50%, but the highest ratio since 1995.

The public debt-to-GDP ratio should rise only moderately in 2021 (to 45.1% of GDP), "but this is subject to significant upside risks," according to the rating agency.

For the next year, Fitch forecasts 5.3% GDP growth and a public deficit of 4.2% of GDP.

The key driver for further actions is the confidence in post-pandemic fiscal consolidation with a positive impact on the stabilisation of the general government debt-to-GDP ratio over the medium-term.