Fitch keeps Romania’s sovereign unchanged at BBB- with stable outlook

Fitch kept on Friday the sovereign rating at BBB- and the outlook at stable, according to a press release. It notes the rating was supported by still moderate public debt, stable banking sector, as well as GDP per capita and governance indicators in line with BBB peers. The agency stresses, however, that there is an increase in downside risks due to significant pro-cyclical fiscal loosening and higher wage growth than productivity growth. The fiscal easing will pushed up the budget deficit to 3% of GDP in 2016 from 0.8% of GDP and will further increase the gap to 3.7% of GDP in 2017 and 4% in 2018 and 2019, higher than the government target. As the structural deficit is to widen to 3.9% of GDP In 2017, which is an expansion of 3.3% of GDP in just two years, Fitch notes that Romania risks entering EDP again.

On a positive note, public debt remains in line with the 41% of GDP median of the BBB- group, and is to increase to 39.9% by end-2017 from 37.6% in 2016 while debt repayments are moderate at 3.5-4.0% of GDP and the government holds an adequate cash buffer equivalent to 3.6% of GDP, covering 5.1 months of gross financing needs. However, economic risk is boosted by fiscal loosening and is to reach 5.1% this year (up from previous forecast of 4.8%) but there is of overheating. The central bank says economy is already 2% above potential. Also, convergence progress is slow due to structural challenges.

Fitch says rating is constrained by net external debtor position at 18.9% of GDP for 2016, higher than the peer estimate of 2%. Yet, it is declining and is majority owned by the private sector. On the other hand, the stable banking sector support the rating. However, recent political developments risk weakening governance indicators and government policy direction.

Fitch says there could be an increase in the rating in case of fiscal consolidation, which improves the long-term trajectory of public debt/GDP, and sustained improvement in external finances. On the other hand, a negative rating move might occur in case of persistent high fiscal deficits leading to an increase in government debt/GDP, and an overheating of the economy that poses a risk to macroeconomic stability.

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