Romania at high risk of downgrade to junk

Romania at high risk of downgrade to junk
By Iulian Ernst in Bucharest September 25, 2020

No one can guarantee that all three major rating agencies will have the patience to see how the 40% pension hike saga ends in Romania before downgrading the country, said Cristian Popa, a member of the National Bank of Romania (BNR) board of directors. The risk of this happening alone might be enough to put Romanian in the junk basket, he added.

The 40% pension hike recently approved by MPs, which would generate RON25bn (€5bn, 2.5% of GDP) supplementary expenditures per year, could push the budget deficit up as high as 11% of GDP in 2021.

The parliament initially passed the 40% pension hike in 2019 in a different economic and political context, and, even then, the law raised concerns. The situation is worse now, as the deficit is already under pressure due to the coronavirus (COVID-19) crisis.

Two of the three rating agencies have scheduled a review of Romania's creditworthiness this autumn: Moody's on October 23 and Fitch on October 30.

Both of them, as well as S&P, rate Romania's sovereign debt at the lowest level in the investment-grade category, with a negative outlook.

Each expects to see a credible public budget consolidation plan if they are not to downgrade Romania.

Fiscal uncertainty gradually surfacing on forex market

Romania's currency weakened by another 0.17% versus the euro, and the official exchange rate crossed the benchmark of RON4.87 to the euro. This came after another 0.1% depreciation in the first day after the parliament decided to keep the 40% pension hike.

More bad news came on September 24 when the Constitutional Court upheld the law that doubles child allowances on the spot, not gradually, as planned by the executive.

The move puts additional pressure on the public budget and has left analysts anticipating the likelihood of a similar decision from the court over the pension hike. Confidence in the government's ability to prevent such a scenario is likely to diminish as the case is judged in legal terms, rather than economic terms.

Raiffeisen Bank head economist Ionut Dumitru, former head of the Fiscal Council, has stressed that the 40% pension hike is critical for the exchange rate's dynamics. If the increase is avoided somehow, "the local currency should not depreciate that badly," Dumitru said.