International rating agency Moody's on April 24 changed the outlook on Romania's ratings to negative from stable while affirming the Baa3 foreign and domestic long-term issuer and senior unsecured ratings.

Based on the attitude of the new Government to be elected this fall or early in 2021, Moody's will decide whether to downgrade the country's debt into the junk area. However, the rating agency points that "severe shocks to the economy and/or intensification of financial risks" could trigger actions in the meantime.

Romanian finance minister Florin Citu stressed that the negative outlook reflects past policies (hence not imputable to his Liberal Government). He also argued that the markets had validated the current Government's policies by the low borrowing cost (of the Eurobonds issued earlier this year) and promises to avoid the downgrade. He stopped, though, short of commenting on the topic high on the agendas of investors and rating agencies: the pension hike in September.

Moody's is the last of the three major rating agencies to put Romania on the negative watch list while keeping it on the lower limit of the investment-grade region. The action will not prompt any effects as the markets have already priced it in. All three agencies, S&P last December followed by Fitch in April, mainly invoked the deterioration of the public finance metrics.

The significant 40% pension hike planned for this September, included in the 2019 pension reform and generating long-term liabilities, is the primary concern mentioned by all three rating agencies.

Moreover, the fiscal deterioration in public finances has been "structural" over the past years, Moody's stresses.

On assumptions of 5% GDP decline this year, Moody's expects Romania's budget deficit to reach 7.7% of GDP in 2020, and 6.2% of GDP in 2021.

The absence of a determined and effective policy response to the country's structural challenges over medium-term would result in a sovereign downgrade, Moody's warned.

Moody's expects to make a decision ("resolve the negative outlook") over the next 12 to 18 months, considering the policy agenda of the Government to be elected at the end of this year or early in 2021.

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editor@romania-insider.com