International rating agency Fitch affirmed Romania's sovereign rating at BBB-, the lowest position in the investment-grade region, but upgraded the outlook attached to neutral from negative.

Political stability seems to be a key ingredient of the brighter outlook. Successful financing of the Current Account deficit (9.3% of GDP in 2022, expected to slightly narrow), showing investors' confidence, must have been another driver.

Other key drivers not mentioned by Fitch are the high inflation (which diluted the public debt and the public deficit to GDP ratios) and the ample grey economy (which supported resilient private consumption).

The agency turned the country's outlook to negative in April 2020 – at the same time as Moody's and months after S&P's in response to public finance metrics' coming under pressure from political instability (Social Democrats were passing populist bills in Parliament, irritating the Liberal Government) and expected shock of Covid-19 crisis.

Both other major rating agencies (S&P and Moody's) currently rate Romania at the same level (BBB- and Baa3, respectively), but they already improved the country's outlook to stable more than a year ago in October 2021. Fitch now says it is impressed with the grand ruling coalition's progress with the fiscal consolidation and economic reform plans.

"We have somewhat greater confidence that relative policy stability will be maintained," in contrast with previous years of short-lived governments and significant competition between the major parties, often with negative consequences for public finances.

Fitch's fiscal projections are only slightly above official ones, with a budget deficit of 4.6% of GDP in 2023 and 4.0% in 2024.

"We expect narrowing of the budget deficit will stem from higher revenues supported by tax reforms, while the expenditure/GDP ratio will remain broadly stable," the rating agency's report reads.

Public debt/GDP stabilised at nearly 49% of GDP in 2021-2022, and Fitch projects it will remain broadly flat over the medium term in the baseline scenario, below the current 'BBB' median of 56%.

Other than public finance, Fitch forecasts 2.3% GDP growth in 2023 and 3.0% in 2024, well above the eurozone growth forecast of 0.8% and 1.4%, respectively, and in line with the 'BBB' median.

EU funds should also moderately improve the growth potential of the economy, estimated by the European Commission to be around 2.5-3%, accelerating the catch-up towards the EU level.

iulian@romania-insider.com

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