London, 24 August 2018 -- Moody's Investors Service, ("Moody's") has
today affirmed Government of Romania's Baa3 long-term issuer and
senior unsecured ratings, the (P) Baa3 MTN programme rating,
as well as the Prime-3 (P-3) short-term issuer ratings
of Romania. The outlook remains stable.
The decision to affirm the ratings and maintain the stable outlook reflects
the following key rating factors:
(1) Romania's moderate economic strength, balancing the economy's
robust medium-term growth potential with structural challenges;
(2) The government's moderate fiscal strength, supported by
a low debt burden and favorable debt affordability metrics, despite
risks posed by a pro-cyclical fiscal policy;
(3) Romania's moderate institutional strength, reflecting
earlier improvements fostered by EU membership as well as emerging risks
of reform reversal;
(4) The country's moderate exposure to event risks, driven
by the moderate external vulnerability risk and, to a lesser extent,
by a volatile domestic political environment.
The stable outlook reflects broadly balanced risks to the rating.
Romania's credit profile remains supported by inherent strengths,
which include solid medium term growth potential and relatively strong
fiscal metrics against risks arising from negative fiscal and institutional
trends which, if sustained over the longer term, would erode
Romania's relative strengths versus its Baa3 peers.
The long-term country ceilings of Romania for local and foreign
currency bonds and for local currency bank deposits remain unchanged at
A3. Its long-term country ceiling for foreign currency bank
deposits remains unchanged at Baa3. Its short-term country
ceiling for foreign-currency bonds remains unchanged at Prime-2
(P-2), and its short-term country ceiling for foreign
currency bank deposits remains unchanged at Prime-3 (P-3).
RATINGS RATIONALE
FIRST DRIVER: MODERATE ECONOMIC STRENGTH BALANCING A ROBUST MEDIUM-TERM
GROWTH POTENTIAL WITH STRUCTURAL CHALLENGES
The first driver of Moody's decision to affirm Romania's ratings
with a stable outlook balances the country's robust medium-term
growth potential with structural economic and governance challenges.
Apart from its growth potential, supported by increasing integration
in the EU value chain, the country's economic strength benefits
from the size and diversification of its economy as well as its wealth
level, measured by a GDP per-capita income (PPP basis) estimated
at $24,508 in 2017. This is above the Baa-median.
These positive attributes of Romania's economic strength are balanced
by limited progress in implementing structural economic and governance
reforms to address weaknesses in the business environment and deficiencies
in infrastructure, whose quality remains relatively low compared
to European peers, as well as weak public investment management
and weak governance of state-owned enterprises.
Romania's above-potential growth of recent years is not sustainable.
The country's growth dynamics are decelerating as monetary policy
becomes less accommodative and the impact of the fiscal stimulus subsides.
Moody's expects Romania's real GDP to expand by 4.0%
and 3.5% in 2018 and 2019, respectively, down
from 6.9% in 2017. While investment dynamics are
expected to improve somewhat, private consumption will continue
to remain the key growth driver while the contribution of net export is
expected to remain negative.
SECOND DRIVER: LOW DEBT BURDEN AND FAVORABLE DEBT AFFORDABILITY
METRICS, DESPITE RISKS POSED BY A PRO-CYCLICAL FISCAL POLICY
The second driver of Moody's decision to affirm Romania's ratings
reflects the government's moderate fiscal strength, balancing
favorable metrics on debt burden and debt affordability with risks posed
by a pro-cyclical fiscal policy. The latter led the general
government deficit to widen substantially to close to 3.0%
of GDP in 2016 and 2017, up from 0.8% in 2015.
Romania's debt trajectory is exposed to the risk of growth and fiscal
shocks. As the quality of the government's expenditure composition
deteriorates, the accompanying increase in budget rigidity raises
the risks to the fiscal position in case of a stronger than expected economic
downturn. A significant exchange rate depreciation would also affect
the debt dynamics given that more than half of the total debt is denominated
in foreign currency. In addition, the 18.1%
share of domestic debt securities held by non-residents (as of
May 2018) exposes the government to some risk in case of a shift in investor
confidence.
That said, Romania's fiscal metrics remain strong and compare
favorably to peers. The government's interest payment burden,
with interest payments absorbing about 4.5% of revenue in
2017, is relatively low and well below the Baa-rated median
(8.4%, excluding Romania), reflecting a combination
of moderate debt levels and low interest rates paid on debt. The
government debt-to-GDP ratio is moderate, at 35%
of GDP at end-2017, well below the Baa-rated median
(48.2% of GDP, excluding Romania). Despite
decelerating growth, the debt-to-GDP ratio is expected
to remain below 40% of GDP over the 2018-21 period.
THIRD DRIVER: MODERATE INSTITUTIONAL STRENGTH, BALANCING PAST
IMPROVEMENTS WITH RISK OF REFORM REVERSAL
The third driver of the affirmation is Romania's moderate institutional
strength, balancing the improvements fostered by EU membership over
the past years against the risk of reform reversal, which somewhat
counterbalances the mentioned credit strengths.
The institutional capacity was significantly strengthened under the aegis
of the EU membership, but Romanian institutions remains weaker than
their EU counterparts. Furthermore, EU institutions have
expressed concerns about the risk of reform reversal posed by recent legislative
initiatives that can weaken the anti-corruption framework and the
rule of law. At the same time, the reversal of the past fiscal
consolidation through measures approved outside the standard fiscal framework's
rules and practices reduces policy credibility and predictability,
weighting on our assessment of institutional strength.
FOURTH DRIVER: MODERATE, ALBEIT INCREASING, EXPOSURE
TO EVENT RISKS, DRIVEN PREDOMINANTLY BY EXTERNAL VULNERABILITY RISK
The fourth driver of the affirmation is the moderate, albeit increasing,
exposure to event risks, driven by the external vulnerability risk
and, to a lesser extent, by the volatile domestic political
environment.
Romania's current account deficit widened to 3.3%
of GDP in 2017 from 2.1% of GDP in 2016, primarily
reflecting the government's pro-cyclical fiscal stance,
and this has increased the downside risks to external position.
The current account deficit in 2017 compared unfavourably with Central
and Eastern European peers, most of which had surpluses.
While the current account deficit is expected to widen to 3.7%
of GDP in 2018, it remains mostly covered by FDI inflows.
Romania's total external debt remains moderated, at about
50% of GDP in 2017, down from 70% in 2013.
At the same time, Romania's volatile political environment,
characterized by frequent governments' turnover, has hampered
policy continuity, resulting in a significant shift toward less
prudent macroeconomic and fiscal policy in recent years. These
political dynamics have not been conducive to structural reforms implementation.
Potential tensions with EU over the fiscal position and judicial reforms
would further undermine policy credibility and could adversely affect
investor sentiment, increasing the susceptibility to event risk.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on the rating balances the country's inherent strengths,
which include solid medium term growth potential and relatively strong
fiscal metrics against risks arising from the current policies which,
if sustained over the longer term, risks eroding Romania's
relative strengths versus its Baa3 peers. Continuing fiscal expansion
and increased budget rigidity are eroding the fiscal buffer to respond
to potential shocks, exposing the fiscal position to a stronger
than anticipated economic slowdown, while persistent political noise
and threats to the rule of law, combined with the limited structural
reforms, weigh on institutional strength and could negatively affect
investor sentiment, increasing the susceptibility to event risk.
WHAT COULD CHANGE THE RATING - UP
Upward pressure on the rating would arise from evidence of sustained improvement
in the fiscal and external metrics accompanied by higher policy predictability
and credibility and institutional effectiveness. The probability
of an upgrade would increase with the implementation of structural reforms
aimed at improving the business environment and addressing the infrastructure
gap with a positive impact on long term growth.
WHAT COULD CHANGE THE RATING - DOWN
Conversely, downward rating pressure would likely develop if the
negative institutional and fiscal trends persist, and the susceptibility
to event risk continue to rise in consequence, undermining the inherent
strengths to a point no longer consistent with a Baa3 rating. The
rating would likely be downgraded if there were evidence of rising macroeconomic
imbalances or further material deterioration in its balance of payments
and international investment position.
GDP per capita (PPP basis, US$): 24,508 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.3%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -2.9%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -3.3% (2017 Actual)
(also known as External Balance)
External debt/GDP: 52.8%
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 August 2018, a rating committee was called to discuss the
rating of the Romania, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer has become increasingly
suceptible to event risks. Other views raised included: The
issuer's institutional strength/framework, have materially decreased.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Daniela Re Fraschini
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
