Fitch Ratings confirmed on Friday, July 6, Romania's long-term foreign- and local-currency issuer default ratings (IDRs) at 'BBB-', with stable outlook, but warned that pro-cyclical fiscal loosening is risky for the macroeconomic stability.

“Romania's investment-grade ratings are supported by moderate levels of public debt, and GDP per capita and governance indicators that are in line with 'BBB' category rated peers. However, pro-cyclical fiscal loosening with a positive output gap poses risks to macroeconomic stability,” reads the Fitch press release.

The rating agency said Romania’s economy stagnated in the first quarter of the year, on a quarter-on-quarter basis, to 4.2%. In the fourth quarter of 2017, the local economy increased by 6.6%. The decrease is the result of the fact that the gains from rapid wage increases and tax cuts have now begun to fade, according to Fitch Ratings. As a result, the agency has left its real GDP forecasts unchanged, projecting growth of 3.8% in 2018 and 3.3% in 2019.

“With the sharp slowdown in 1Q18 GDP, weakening of economic sentiment indicators, tighter monetary policy, higher inflationary pressures, and renewed external uncertainties, a "hard-landing" scenario presents a downside risk. Balancing fiscal policy with macroeconomic stability is likely to be challenging for the government.”

The rating agency also said that the expansionary fiscal policy has weakened the public finances, adding that it expects Romania's budget deficit to widen towards 3.4% of GDP in 2018 and 3.6% in 2019. This would be above the EU's Maastricht ceiling of 3% of GDP, and contrasts with the government's budget deficit target of 2.96% of GDP for 2018, based on real GDP growth of 5.5%.

“Romania's external finances remain weaker than that of 'BBB' rated peers. Pro-cyclical fiscal policy, which fuelled domestic consumption, led to a widening of the current account deficit (CAD) to 3.4% of GDP in 2017 from 2.1% in 2016. For 2018-2019, Fitch is projecting an average CAD of 3.9% of GDP on the back of a widening trade deficit. This compares with a median CAD of 2.1% of GDP across 'BBB' rated peers,” the press release also reads.

“A widening of the CAD risks stalling the decline in Romania's net external debt position, which at an estimated 19.3% of GDP (end-2017) remains above the majority of 'BBB' rated peers.”

On the good side, Fitch Ratings said the Romanian banking sector remains stable. “Banks are well-capitalised, with an average capital adequacy ratio of 19.8% (March 2018).”

However, the rating agency also pointed to the price inflation, which spiked to 5.2% in April this year, “reflecting exchange rate depreciation, higher energy prices and administered prices, as well as strong domestic demand.”

Fitch also said that the uncertainty surrounding judicial reform remains a risk to Romania’s governance indicators.

“Lack of public support for controversial reforms to the criminal code has caused political tensions within the ruling coalition parties (PSD-ALDE). Following a temporary loss of majority seats in the lower house of parliament in May, which has now been restored, PSD-ALDE also survived a no confidence motion on June 28.” However, the rating agency doesn’t see a risk of early elections. Parliamentary elections are scheduled for 2020.

IMF warns that Romania’s economy may be overheating

Irina Marica, irina.marica@romania-insider.com