News Analysis: Romanian economy at crossroads as S&P turns negative on outlook

Source: Xinhua| 2019-12-13 05:08:51|Editor: Mu Xuequan
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by Lidia Moise

BUCHAREST, Dec. 12 (Xinhua) -- Rating agency Standard & Poor's (S&P) has taken a more pessimistic view of Romania's finances, revising recently the country's outlook to "negative" from "stable", citing increasing risks to the economic and fiscal stability.

The revision was a surprise as the last rating assessment S&P performed was in early September 2019. "Romania's fiscal deficit is widening more rapidly than we originally projected," noted S&P.

However, S&P maintained Romania's debt rating at "BBB-," still investment grade, but only one notche above "junk" status.

"It's a warning because from the standpoint of S&P it will be very difficult for Romania to maintain its investment rating if all pension increases are implemented, as the current law states. They see that the pension bill is pushing the budget deficit over 4 percent of GDP next year and we also estimate the deterioration of fiscal deficit at the same level," Dan Bucsa, Unicredit's chief economist for Central and Eastern Europe, told Xinhua.

"S&P based its outlook revision on the increasing fiscal deficit and the current account deficit widening, but also considering the slowdown of the economy. Furthermore the agency warned about a potential rating downgrade within the next 24 months if fiscal and external imbalances continue to deteriorate and persist for longer than the agency anticipates," he added.

S&P also said that "low economic wealth, relatively weak administrative capacity, an unpredictable policy environment, and only average monetary flexibility relative to peers" restraint the rating perspective.

SOVEREIGN BOND'S YIELDS UNDER PRESSURE

Economists of Romanian Commercial Bank (BCR) read S&P's revision also as a warning that may precede a downgrade.

"Romania's rating sits at the bottom of investment grade (BBB-) and faces a risk of being downgraded to junk unless the fiscal loosening is brought under control. Markets have been partially pricing in such a risk, as spreads on long-term Eurobonds have been the highest from the peer group of BBB+/- countries," said BCR economist Dorina Ilasco in a note to investors.

S&P's analysts also noted that the yields on government securities "showed fluctuations over 2018-2019, with an increase in the cost of government borrowings." They said that the higher costs of the government's borrowing "reflects the country's higher financing needs and greater uncertainty regarding fiscal policy."

THE COMFORT OF LOW DEBT LEVEL

The comfortable level of the stock of the government debt and the European Union membership of the country are supporting elements for the rating, noted S&P.

"Romania's government debt stood at 35 percent of GDP in 2018, with government liquid assets representing approximately 5 percent of GDP. The maintenance of this fiscal reserve buffer will continue to help limit refinancing risk, alleviating the effects on access to financing in the event that foreign investment starts dwindling," added S&P.

One month ago, Fitch rating agency noted that the investment-grade ratings are supported "by moderate levels of government debt," and added that "GDP per capita and human development indicators are above "BBB" category peers." Romania has a GDP per capita of 12,300 U.S. dollars in 2018 and will post a 12,500 U.S. dollars figure at the end of this year, according to official estimates.

ADDITIONAL PRESSURE ON CURRENCY

Romania's main vulnerabilities are the so called twin deficits, the fiscal and the current account deficit which are the highest in the region. Albeit the current account deficit showed signs of leveling off in the second half of 2019, at 5 percent of GDP remains one of the highest in the EU.

S&P observed the shift to the debt financed inflows as a more important source to cover the deficit, from the foreign direct investment and capital accounts flows, which are lower. "We note a lack of foreign greenfield investments, suggesting that investors might be increasingly hesitant due to the rapid wage growth, lack of infrastructure development, and continuing political and policy uncertainties in Romania. This will likely keep Romania's external debt on an upward trajectory," warned S&P.

But, "despite the uncertain fiscal outlook", S&P is expecting that the Romania's central bank will keep inflation expectations under control and will maintain adequate foreign currency reserves.

S&P noted that "the National Bank of Romania has countered depreciation pressures on the national currency leu through intervention in the foreign currency market," but warned that "a failure to anchor fiscal policies will pressure the leu, further complicating the central bank's mission."

"We expect the central bank to uphold monetary policy credibility, anchor inflation expectations, and keep foreign currency reserves at a solid level," added S&P.

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