On October 15, Moody's has unexpectedly changed from negative to stable the outlook on the Government of Romania, despite "policy inconsistency resulting from unstable government coalitions."

The rationale stems from factors that are rather exogenous drivers, the agency explains: Romania's robust growth potential underpinned by a dynamic private sector and the Recovery and Resilience Facility (RRF) on the one hand and the expectation of a consistent and sustained fiscal consolidation strategy anchored in the Excessive Deficit Procedure (EDP) on the other hand. In this regard, the outlook improvement is rather forward-looking, underpinned by expectations rather than an improvement in the existing conditions (reforms already implemented).

Moody's also affirmed the Baa3 long-term issuer, senior unsecured and senior unsecured MTN programme ratings - which maintains Romania's sovereign rating on the verge of the junk region.

The affirmation of Romania's Baa3 rating reflects the country's moderate institutions and governance strength, Moody's explains.

Romania's rating depends on the public finances (fiscal imbalance) seen by Moody's as linked to "a determined policy response in relation to pension and public administration reforms" and the current account deficit regarded in connection with its "stable financing sources (FDI, equity, capital account)."

Upward pressure will result if the Romanian Government's balance sheet strengthens faster than Moody's currently anticipates.

Moody's forecasts a deficit of 6.8% of GDP in 2022 (under ESA, meaning accrual basis - from 8.2% of GDP in 2021), 5.6% of GDP in 2023 and 4.5% of GDP in 2024. Although declining, the forecasted deficits will thus remain above the debt stabilizing threshold over the next three years.

As a result, Moody's projects the debt-to-GDP ratio to continue to rise in 2022 and 2023, peak in 2024 at 56.6% (gross terms) before starting to decline in 2025. The debt-to-GDP ratio increased from 35.3% in 2019 to 47.3% in 2020.

iulian@romania-insider.com

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