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Rating Action:

Moody's affirms Romania's Baa3 issuer ratings; outlook stable

24 Aug 2018

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

No Related Data.
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