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Rating Action:

Moody's changes the outlook on the Baa3 issuer rating of Romania to stable from positive, ratings affirmed

21 Apr 2017

Frankfurt am Main, April 21, 2017 -- Moody's Investors Service has today changed the outlook on the ratings of the Government of Romania to stable from positive. At the same time, the rating agency has affirmed the Baa3 long-term issuer rating and senior unsecured ratings, the (P) Baa3 MTN programme rating, as well as the Prime-3 (P-3) short term issuer rating of Romania.

The key drivers for changing the rating outlook to stable from positive are:

(1) The expansionary fiscal policy of Romania that has resulted in a material widening of its fiscal deficit, and which is expected to lead to an upward trajectory in the government debt-to-GDP ratio.

(2) The pro-cyclicality of macroeconomic policy, which has led to rapid wage growth, a deterioration in price competitiveness and a widening of the current account deficit.

These developments are contrary to the economic and fiscal trends anticipated at the time of Moody's decision to change the outlook to positive from stable in December 2015.

At the same time, Moody's has affirmed the Baa3 ratings of Romania based upon the underlying fundamentals of the economy and convergence trends regarding wealth and institutional strength under the aegis of EU membership. Although expected to weaken somewhat, the still relatively moderate debt levels relative to GDP and revenue, as well as strong debt affordability metrics, also support the current rating level. Finally, in our view, vigilance from the EU and the IMF are expected to support an anchoring of the economic and fiscal policies of Romania in spite of its fragmented political landscape.

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

In December 2015, the positive outlook on the ratings of Romania were based upon the expectation that the improvement of fiscal and debt metrics would be sustained, and the vulnerability of the economy to external shocks would be reduced. Those assumptions are not supported by the economic and fiscal trends observed since then or by those expected going forward.

FIRST DRIVER: THE EXPANSIONARY FISCAL POLICIES OF THE GOVERNMENT OF ROMANIA

The first driver for moving the rating outlook to stable from positive is based upon the deterioration in the public finance and debt outlook for the Government of Romania. We forecast that its debt-to-GDP ratio will rise over the medium term, after having fallen slightly over the past two years. This is as a result of already implemented and forthcoming fiscal relaxation measures under the "Fiscal Code", that affect government revenue and expenditure.

The fiscal relaxation agenda of the government and the resulting rise in the government debt-to-GDP ratio from this year onwards indicates that Romania has not taken advantage of the favourable macroeconomic and financial market conditions to bring its public debt onto a clear downward trajectory and to restore the fiscal buffers it lost in the aftermath of the crisis.

After six years in whcih the fiscal deficit fell from more than 9% of GDP in 2009 to below 1% of GDP in 2015, the public finances of Romania have passed a turning point, and they are expected to continue to deteriorate over coming years as a result of the fiscal easing stance of the "Fiscal Code" and additional measures introduced by the government. The government debt burden and debt affordability metrics are set to deteriorate over the medium term and we expect government debt stock to be above 45% by 2021, as compared to 38.0% at the end of 2015 and 12.7% in 2007. Such a deterioration would leave Romania more susceptible to worsening external market conditions.

SECOND DRIVER: THE PRO-CYCLICAL FISCAL POLICIES OF THE GOVERNMENT OF ROMANIA AND RAPID WAGE GROWTH ERODE COMPETITIVENESS

Although near-term growth is robust, it is largely driven by an expansionary fiscal policy. Strong demand-driven growth is also threatening external price competitiveness. Although we expect a continuation of robust real GDP growth in the medium term (real GDP was 4.8% in 2016, and is forecast to be 4.0% in 2017 and 3.5% in 2018), the presently very favourable growth momentum is not sustainable and overstates Romanian long-term growth potential. Economic momentum has shifted away from an export-driven recovery to a domestic demand-driven recovery fuelled by fiscal stimulus.

With regard to the supply side of the economy, the long-term growth potential of Romania is slightly above 3% and remains far lower than before the crisis. More importantly, it remains constrained by the lack of structural economic reforms, remaining weaknesses in the institutional framework and institutional effectiveness, economic policies that hinder stronger private investment, a comparatively low labour participation rate, and emigration. Progress on structural economic reforms as well as improvements to infrastructure have been limited and slow.

Romanian price and non-price competitiveness remain constrained by delays in public investment (including the absence of long-term and strategic planning leading to an insufficient pipeline of projects), lack of prioritisation of investment projects and a low absorption rate for EU structural funds leading to under-utilisation of available external financial resources.

As a result of strong internal demand growth, the current account deficit of Romania doubled in 2016 to 2.3%, thereby continuing to reverse the trend of narrowing external deficits that occurred between 2007 and 2014. We expect the current account deficit to widen to around 3.0% of GDP in 2017 and to 3.1% of GDP in 2018 (from 0.7% in 2014). A widening current account deficit will prevent a further significant decline in net international investment position liability and external-debt-to-GDP ratios.

WHAT COULD RESULT IN AN UPGRADE

Upward pressure upon the rating might be exerted by evidence of more balanced and, hence, sustainable real GDP growth, improvements in the institutional framework and effectiveness and a prolonged improvement in government and external debt ratios.

WHAT COULD RESULT IN A DOWNGRADE

Downward pressure upon the rating might arise from evidence of a further significant deterioration in public finances leading to an additional significant rise in the government debt ratio and sovereign borrowing requirements, a further significant decline in external competitiveness, or an increasing deterioration in its balance of payments and international investment position.

GDP per capita (PPP basis, US$): 20,872 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 4.8% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.5% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -2.8% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.3% (2016 Actual) (also known as External Balance)

External debt/GDP: 52.2% (2016 Actual)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 18 April 2017, a rating committee was called to discuss the rating of the Romania, Government of. The main points raised during the discussion were: The economic fundamentals of the issuer, including its economic strength, have not materially changed. The institutional strength/framework of the issuer have not materially changed. The fiscal or financial strength of the issuer including its debt profile has decreased. The susceptibility to event risks of the issuer has not materially changed.

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.

Simon Griffin
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
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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