Moody's Investors Service has changed the outlook on its ratings for Romania to stable from positive, following the country’s expansionary fiscal policy, the ratings agency announced on April 21. At the same time, it has affirmed the Baa3 long-term issuer rating and senior unsecured ratings, the (P) Baa3 MTN programme rating, as well as the Prime-3 (P-3) short term issuer rating of Romania.

The change in outlook is the first negative signal from a rating agency since the government announced salary hikes and tax reductions, which are expected to increase budget deficit. The IMF and the European Commission have already forecast the deficit will exceed the 3% of GDP threshold for the EU's Excessive Deficit Procedure.

Romania's expansionary fiscal policy has resulted in a material widening of its fiscal deficit, and this is expected to lead to an increase in the government debt to GDP ratio, Moody’s said. The ratings agency considers that Romania has not taken advantage of the favourable macroeconomic and financial market conditions to bring its public debt onto a clear downward trajectory and to restore the fiscal buffers it lost in the aftermath of the crisis.

The change in outlook was also triggered by the pro-cyclical macroeconomic policy, which has led to rapid wage growth, a deterioration in price competitiveness and a widening of the current account deficit.

“In December 2015, the positive outlook on the ratings of Romania were based upon the expectation that the improvement of fiscal and debt metrics would be sustained, and the vulnerability of the economy to external shocks would be reduced. Those assumptions are not supported by the economic and fiscal trends observed since then or by those expected going forward,” Moody’s said.

Romania’s public finances are expected to deteriorate over coming years as a result of the fiscal easing measures introduced by the government. The government debt burden and debt affordability metrics are set to deteriorate over the medium term and Moody's expects government debt stock to be above 45% by 2021, as compared to 38.0% at the end of 2015 and 12.7% in 2007. 

On the other hand, Moody’s expects GDP to continue to expand in the medium term. The economy is expected to grow by 4% this year and by 3.5% next year.  However, growth remains constrained by the lack of structural reforms, remaining weaknesses in the institutional framework and institutional effectiveness, economic policies that hinder stronger private investment, a comparatively low labour participation rate and emigration.

Moody’s kept Romania's long-term country ceilings for local and foreign currency bonds and for local currency bank deposits unchanged at A3. Its long-term country ceiling for foreign currency bank deposits remains unchanged at Baa3. Its short-term country ceiling for foreign-currency bonds remains unchanged at Prime-2 (P-2), and its short-term country ceiling for foreign currency bank deposits remains unchanged at Prime-3 (P-3).