S&P raises Romania’s outlook to stable as fiscal risks recede

S&P raises Romania’s outlook to stable as fiscal risks recede
By Iulian Ernst in Bucharest April 17, 2021

International rating agency Standard & Poor’s (S&P) has revised its outlook on Romania’s sovereign debt to stable from negative, while affirming its BBB- rating.

The move surpassed the expectations of Prime Minister Florin Citu, who expressed hopes of such a step from the rating agencies by the end of the year at best. In a brief statement after the rating agency’s action, Citu thanked the private sector, entrepreneurs in particular, and announced that the budget execution is also exceeding his expectations. The confidence expressed by S&P will mean lower financing cost and will help the economy recover faster, he also said.

The rating agency noted that the recently instated government will “defuse near-term fiscal risks” mainly by rolling back previous costly pension legislation. Romania's short-term fiscal risks have abated, the rating agency’s statement reads. The reform window is now open until 2024, it also said, implying that more is to be done.

As regards the further steps to be taken by the government, S&P sees revenue-side measures as key to improving Romania's dismal revenue generation performance and closing the largest value-added tax gap in the EU. Thus far, the government's consolidation efforts have primarily focused on the expenditure side of the budget, the rating agency noted, anticipating that the government will broaden its budgetary rebalancing efforts to include revenue-side measures.

The rationales for bringing Romania back from the negative watch list also include the resilience demonstrated by Romania’s economy in 2020 when it contracted by only 3.9% (“a mild outturn by regional standards”) and its expected recovery in 2021, seen at 5%.

The grants from the EU's Recovery and Resilience Facility (RRF) amounting to 6.5% of the country’s annual GDP — even discounted for Romania’s comparatively weak record of absorbing EU funds — on top of the  7.0%-of-GDP soft loans, under the same RRF, are seen as a key driver for rebuilding the economy after the pandemic in the country while also playing a key role in the country’s external balance.

Finally, S&P argued that Romania’s ratings are supported by its solid access to external financing markets. The rating agency expects the government's fiscal rebalancing efforts to stabilise Romania's net general government debt at around 50% of GDP while keeping interest expenditure below 5% of revenue. Romania’s net general government debt soared to 42.9% of GDP at the end of 2020, 10.9pp up y/y, and is expected to further increase to 48.5% by the end of 2021, but to peak at 51.3% at the end of 2023 to further decline, according to S&P.

As regards the general government deficit, it is seen by S&P at 7% of GDP — against the government’s 7.16% target. The rating agency trusts Romania can bring the public deficit down to 3% of GDP in 2024.

S&P placed Romania on the negative watch list in December 2019, citing a 40% pension hike inked in the Pension Law drafted and promoted by the Social Democrats (PSD) whose government had just been dismissed at that time.

The Liberal government led by PM Ludovic Orban had the delicate mission to face not only the pandemic but also a hostile parliament where the Social Democrats used their ad-hoc majority to pass populist measures with a major impact on the budget, prompting all major rating agencies to keep the country on the negative watch list and wait for the autumn 2020 general elections.

The new government formed by the Liberals with reformist USR-PLUS is headed by former finance minister Citu and made gradual fiscal consolidation and economic recovery the main target.