Frankfurt am Main, April 24, 2020 -- Moody's Investors Service ("Moody's") has today changed the outlook on
the Government of Romania's ratings to negative from stable and
affirmed the Baa3 foreign and domestic long-term issuer and senior
unsecured ratings. The senior unsecured MTN programme (P)Baa3 ratings
as well as the Prime-3 (P-3) short-term issuer ratings
in foreign and domestic currency have also been affirmed.
The two key drivers for the change of the outlook to negative are:
1. A structural deterioration in public finances compounded by
an increase in long-term liabilities that relate to the 2019 pension
reform;
2. A worsening of Romania's external position with an increase
in short-term foreign-currency debt that heightens the country's
susceptibility to event risk.
The affirmation of Romania's Baa3 ratings balances the country's
strong medium-term growth potential and stronger economic metrics
than the median of Baa3-rated sovereigns against the deteriorating
trend in public finances and the worsening of Romania's external
position. The affirmation of Romania's Baa3 ratings also
takes into account the country's moderate institutions and governance
strength.
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
ceilings for foreign-currency bonds and foreign-currency
bank deposits remain unchanged at Prime-2 (P-2) and at Prime-3
(P-3), respectively.
RATINGS RATIONALE
RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVE FROM STABLE
FIRST DRIVER: A STRUCTURAL DETERIORATION IN PUBLIC FINANCES COMPOUNDED
BY AN INCREASE IN LONG-TERM LIABILITIES THAT RELATE TO THE 2019
PENSION REFORM
The first driver of the action is the ongoing trend of a structural deterioration
in Romania's public finances which is compounded by an increase
in long-term liabilities that relate to the 2019 pension reform.
In addition, this year's economic recession in the context
of the coronavirus outbreak weighs on Romania's fiscal outlook,
as Moody's forecasts Romania's GDP to contract by 5.0%
in 2020. Moody's expects Romania's general-government fiscal
deficit to reach 7.7% of GDP in 2020, followed by
a deficit of 6.2% of GDP in 2021. The government's
response to the economic consequences of the coronavirus crisis is targeted
to support households and corporates. In particular, the
country's technical unemployment scheme aims to provide workers
with up to 75% of the gross average wage. Revenues will
also be affected by the recession as automatic stabilizers kick in.
Moody's forecast includes the fiscal impact of the pension reform that
was adopted in June 2019. In the short term, the 40%
increase in the pension point scheduled for 1 September 2020 will --
if implemented -- push current expenditures upwards, with the
full effect on public accounts taking place in 2021. In the medium-term,
public pension spending is projected to reach 11.6% of GDP
by 2030 absent a policy change, almost double compare to the previous
projections from the national authorities, which foresaw 6.6%
of GDP in 2030. On top of the cumulative effects of ad-hoc
increases, a more generous indexation formula and shorter contribution
periods -- if not reversed -- will drive public pension spending
over the next decade.
The pension reform increases the budgetary pressures stemming from the
combined negative impact of an ageing population and net migration outflows
that results in an expected absolute decline in the number of inhabitants.
According to the European Commission's 2018 Ageing Report projections,
Romania's population aged 65 or above will represent 34.7%
relative to the 15-64 years population in 2030, sharply up
from 26.3% in 2016. Over the same period, the
population is expected to shrink from 19.7 million to 18 million.
As a result of the deterioration of the fiscal balance and the economic
recession, Moody's expects Romania's debt-to-GDP
ratio will increase to 43.7% by the end of this year from
35.2% of GDP in 2019. Looking ahead, Moody's
forecasts Romania's deficit to narrow gradually to 6.2%
of GDP in 2021 and 4.4% of GDP in 2022. Under this
scenario, public debt would reach 46.8% of GDP in
2021 and 47.8% of GDP in 2022.
Even prior to the impact of the economic slowdown, Romania's
general government deficit had been on an adverse trend, rising
from 0.6% of GDP in 2015 to 4.3% of GDP in
2019. Romania's widening deficit is of structural nature
and has emerged against the backdrop of buoyant economic growth (4.9%
real GDP growth on average between 2015 and 2019). The increase
in public spending resulted from strong growth in the public sector wage
bill, driven by net hires and substantial wage increases.
The fall in revenues followed significant cuts in personal income tax
(rate reduction from 16% to 10%, with a RON 13.5
billion impact in 2018, or 1.4% of GDP in 2018) and
value-added tax (two-stage reduction in the standard VAT
rate, from 24% in 2015 to 20% in 2016 and 19%
in 2017, with an estimated RON 11.0 billion impact,
or 1.3% of GDP in 2017).
SECOND DRIVER: A WORSENING OF ROMANIA'S EXTERNAL POSITION
WITH AN INCREASE IN SHORT-TERM FOREIGN-CURRENCY DEBT THAT
HEIGHTENS SUSCEPTIBILITY TO EVENT RISK
The second driver of the action is the worsening of Romania's external
position, with an increase in short-term foreign currency
debt that heightens the country's susceptibility to event risk.
Romania's sizeable external debt (47.5% of GDP at
the end of 2019) has gradually shifted towards a higher share of short-term
debt against the backdrop of increased borrowing from non-financial
companies and deposit-taking companies except the central bank.
At the end of 2019, the share of short-term on total external
debt stood at 30.4% against 26.1% at the end
of 2016. As a result, the external vulnerability indicator
(EVI) has been rising since 2014 and is expected to reach 164%
in 2020.
Romania's exposure to the rest of the world is significant,
with non-residents holding 46.3% of the country's
total public debt, and the share of foreign-currency denominated
debt standing at 48.7% in 2019. A depreciation of
the leu would lead to a further deterioration of Romania's public
finances. However, Moody's notes that the Romanian
treasury's debt management strategy to develop the domestic market
for government securities is a mitigant to Romania's susceptibility
to external-vulnerability risk. The strategy has supported
a gradual rise in the share of local-currency denominated general
government debt securities over the past five years, reaching 51.3%
in 2019 against 46.2% in 2015.
The build-up of short-term external debt and the worsening
of the EVI have been accompanied by an adverse trend with respect to Romania's
current-account deficit. From an almost balanced position
in 2014, the current-account deficit has risen markedly to
4.6% of GDP in 2019. A deteriorating goods balance
drove the overall current account, as import-intensive growth
outpaced solid export performance. Imports of consumer goods have
grown faster than other imports, against the backdrop of an expansionary
and pro-cyclical fiscal policy which has led to a twin-deficit
situation.
The pace of increase of the current-account deficit has been accompanied
by a decline of its coverage by foreign direct investments (FDI).
While the coverage of the current-account deficit by non-debt
generating flows (FDI, equity, capital account balance) was
well above 100% between 2013 and 2016, the ratio dropped
to 111% in 2017, followed by 84% in 2018 and 79%
in 2019. Looking ahead, FDI's are likely to remain
subdued in the near term due to the economic recession and the general
contraction in international flows. Although the anticipated reduction
in the current account deficit due to suppressed demand will reduce financing
needs, Moody's expects non-debt generating flows to
remain insufficient to fully cover the deficit.
RATIONALE FOR AFFIRMING THE RATINGS AT Baa3
The affirmation of Romania's Baa3 rating balances the country's
strong growth potential with a deteriorating trend in public finances
as well as the worsening of Romania's external position.
The rating is supported by our expectation that Romania's post-coronavirus
growth potential will remain underpinned by a dynamic private sector and
the commitment of foreign-owned companies operating in Romania.
The affirmation of Romania's Baa3 rating reflects also the country's
moderate institutions and governance strength.
Compared to Baa3-rated sovereign peers, Romania's economy
is both larger (USD 241.6 billion against a median of USD 210.2
billion in 2018) and faster-growing than the Baa3 median (3.6%
against 1.5% on average between 2014 and 2023). With
respect to fiscal metrics, Romania's debt affordability compares
favourably to the Baa3 median, with both interest payments-to-GDP
(1.2% in 2018) and interest payments-to-revenues
(3.7% in 2018) below the median (2.8% and
4.9%, respectively, in 2018). This is
also the case for debt burden indicators, with both the debt-to-GDP
and the debt-to-revenues ratios below that of Baa3 median
(34.7% and 108.5% against 46.8%
and 161.1%, respectively, in 2018).
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Moody's takes account of the impact of environmental (E), social
(S) and governance (G) factors when assessing sovereign issuers' economic,
institutional and fiscal strength and their susceptibility to event risk.
In the case of Romania, the materiality of ESG to the credit profile
is as follows.
Environmental considerations are not material to Romania's credit
profile, and the country has not been identified as being one of
the sovereigns materially exposed to physical climate change risks.
Romania has among the lowest greenhouse gas emission per person in the
European Union (EU), although carbon intensity (tonnes per EUR 10
000 GDP) is among the highest. The share of renewable energy sources
has increased over the last decade, standing at 23.9%
in overall energy consumption in 2018, above the EU average of 18.9%.
However, Romania is amongst the EU countries most subject to large
flooding events, and about 13% of the country lies in floodplains.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given substantial implications for public health and safety. The
spread of the coronavirus, deteriorating global economic outlook,
falling oil prices, and asset price declines are creating a severe
and extensive credit shock across many sectors, regions and markets.
We believe that the combined negative effect of these developments will
put further pressure on Romania's credit metrics. On a structural
basis, a combination of a negative natural rate of population growth
and net migration outflows weigh on the country's labour supply,
partially impairing the labour market and dragging down potential growth.
Adverse demographics are also likely to weigh on fiscal sustainability
in the medium-term.
Romania's governance considerations are reflected in our assessment of
institutions and governance strength. Moderate performances in
terms of rule of law and control of corruption, as exhibited by
the Worldwide Governance Indicators (WGI) are combined with uneven macroeconomic
policy effectiveness.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT WOULD CHANGE THE RATING UP
Given the negative outlook, a rating upgrade is unlikely in the
near future. Moody's would likely change the rating outlook to
stable if it were to conclude that the government is successful in halting
and -- over the medium-term -- reversing the structural
deterioration in public finances. In the medium-term,
structural fiscal consolidation supported by higher tax collection and
a lower share in current expenditure would improve fiscal sustainability.
Together with a rebalancing towards higher investment expenditure,
a steady reduction in the structural current-account deficit and
increased coverage by non-debt generating flows would also be credit
positive.
WHAT WOULD CHANGE THE RATING DOWN
Romania's ratings would likely be downgraded were Moody's to conclude
that Romania's fiscal strength will continue to structurally deteriorate
while external imbalances remain at an elevated level. Ultimately,
this conclusion would likely reflect the medium-term absence of
a determined and effective policy response to the country's structural
challenges, weakening our assessment of institutional and governance
strength. Absent further severe shocks to the economy and/or intensification
of financial risks, Moody's expects to resolve the negative
outlook over the next 12 to 18 months. Under this scenario,
Moody's assessment would take into consideration the policy agenda
of the government to be elected at the end of this year or early in 2021.
GDP per capita (PPP basis, US$): 26,448 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.4% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (HICP, % change): 3.0%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -2.9%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -4.4% (2018 Actual)
(also known as External Balance)
External debt/GDP: 48.8% (2018 Actual)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 April 2020, 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 materially decreased. The issuer has become increasingly susceptible
to event risks.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Olivier Chemla
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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 Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
