International rating agency Moody's on April 24 changed the outlook on the government of Romania's ratings to negative from stable and affirmed the Baa3 foreign and domestic long-term issuer and senior unsecured ratings.

The rating agency says that the attitude of the next government, to be elected this autumn or early in 2021, will be critical in deciding whether to move the country’s debt into the junk area, unless “further severe shocks to the economy and/or intensification of financial risks” occur meanwhile.

“Absent further severe shocks to the economy and/or intensification of financial risks, Moody's expects to resolve the negative outlook over the next 12 to 18 months,” the rating agency says.

Romanian Finance Minister Florin Citu argued that the negative outlook reflects past policies and is hence not imputable to his Liberal government. He also argued that the markets have validated his policies by the low borrowing cost of the Eurobonds issued earlier this year and promises to avoid the downgrade. However, he failed to address the investors’ main concerns by admitting that the 40% pension hike planned for this fall is not realistically possible. The planned hike would prompt “severe shocks to the economy and intensification of financial risks”.

Moody’s is the last of the three major rating agencies to put Romania on the negative watch list while keeping it at the lower limit of the investment-grade region. The action will not prompt any effects as it was already priced in by the markets.

All three agencies, S&P last December followed by Fitch in April, mainly cited the deterioration of Romania’s public finances. The 40% pension hike planned for this September, part of the 2019 pension reform and generating long-term liabilities, is the main concern mentioned by all three rating agencies, but the fiscal deterioration in public finances has been “structural” over the past years, Moody’s stressed.

On assumptions of 5% GDP decline this year, Moody's expects Romania's general government fiscal deficit to reach 7.7% of GDP in 2020, followed by a deficit of 6.2% of GDP in 2021.

The external balances, namely the current account deficit and the structure of the external debt, are also rising concerns, at various degrees though, among the rating agencies. Moody’s particularly stresses the worsening of Romania's external position with an increase in short-term foreign-currency debt that heightens the country's susceptibility to event risk.

The worsening of Romania's external position is the second driver mentioned by Moody’s, which points to an increase in short-term foreign currency debt that heightens the country's susceptibility to event risk. Romania's sizeable external debt (47.5% of GDP at the end of 2019) has gradually shifted towards short-term debt contracted by non-financial companies or banks (as deposits taken from non-residents).

Separately, Romania's exposure to foreign lenders is significant (46.3% ) and the share of forex denominated debt is even higher: 48.7% in 2019. Consequently, the weaker domestic currency would lead to a further deterioration of Romania's public finances. Certain improvement in this regard is noted by Moody’s, though.

Moody's expects to decide on a potential downgrade (“resolve the negative outlook”) over the next 12 to 18 months by taking into consideration the policy agenda of the government to be elected at the end of this year or early in 2021.