Frankfurt am Main, December 11, 2015 -- Moody's Investors Service ("Moody's") has today changed the outlook on Romania's Baa3 government ratings to positive from stable. Concurrently, Moody's has affirmed Romania's Baa3/P-3 ratings.
1. Romania's significant progress in correcting its macroeconomic imbalances, reducing the economy's vulnerability to external shocks and paving the way for robust economic growth.
2. Romania's sizeable fiscal adjustment in the recent past, leading to a significant reduction of the government's fiscal deficit and contributing to a stabilization of the government's debt-to-GDP ratio.
That said, Moody's decision to affirm Romania's Baa3 government rating balances those credit-positive drivers against challenges including the potential risk that fiscal easing - as envisaged by Romania's new Fiscal Code - could lead to a deterioration of the government's fiscal outlook and could affect the economy's price competitiveness, should wages grow persistently faster than labour productivity.
Romania's local and foreign-currency bond ceilings remain at A3 and A3/P-2, respectively. The local and foreign-currency deposit ceilings remain at A3 and Baa3/P-3, respectively.
The first factor supporting Moody's decision to change the outlook on Romania's Baa3 government rating to positive is Romania's significant progress in correcting its macroeconomic imbalances. Mainly driven by an increase in exports, Romania's trade deficit shrunk noticeably to 4.2% of GDP in 2014, from more than 16% of GDP in 2007. As a result, Romania's current account deficit narrowed substantially to 0.5% of GDP in 2014, from 13.5% of GDP in 2007.
Amid a narrowing current account deficit and a recovering economy, Romania's net international investment debtor position has declined for the past two years to below 60% of GDP, and the external-debt-to-GDP ratio has fallen to around 50% in 2014 from a peak of around 60% in 2010. Meanwhile, Romania's non-financial corporate and private household sectors have reduced their financial debt ratios, while banking sector risks have subsided in light of a further decline in non-performing loans and comparatively high levels of loss provisioning and capital adequacy.
Romania's macroeconomic rebalancing has also reduced the economy's vulnerability to external shocks. Moreover, Romania's improved price and non-price competitiveness in the wake of the global financial crisis -- as evidenced by a decline in real unit labour costs -- led to a rise in Romania's market share of world exports and to an improvement in Romania's scores in the World Economic Forum's Global Competitiveness Index.
These developments have paved the way for strong economic growth. Moody's forecasts Romania's economic recovery to gain further momentum in 2016, thanks to a robust expansion of private consumption and investment as well as solid public consumption growth, which will allow real GDP growth to accelerate to 4.1% in 2016, from 3.5% in 2015.
The second factor underpinning the outlook change on Romania's government bond rating to positive is based on the government's sizeable fiscal adjustment since 2009. Romania has demonstrated its ability and willingness to consolidate government finances in a challenging economic environment, with a considerable reduction of Romania's fiscal deficit to 1.4% of GDP in 2014 from around 9% in 2009.
The decrease in the deficit of 7.7 percentage points of GDP was mainly achieved by a retrenchment of public expenditures (-5.7 percentage points), aided by higher revenues (+2.0 percentage points). While cuts in public wages (-3.1 percentage points of GDP) contributed the most on the expenditure side, higher indirect tax revenues, including from value-added tax, boosted the government's revenues (+2.2 percentage points of GDP; direct tax revenues remained stable as a percentage of GDP, while social security contributions received shrunk). The rating agency notes that Romania's fiscal consolidation was faster and more pronounced than in many other European countries, including Spain (Baa2 positive) and Portugal (Ba1 stable).
Romania's significant fiscal consolidation has contributed to a stabilisation of the government-debt-to-GDP ratio. While Romania's debt-to-GDP ratio increased considerably between 2008 and 2012 (from roughly 13% to around 37%) due to large fiscal deficits and slow growth, it has started to stabilise since 2012 as a result of reduced deficits (expected at 1.2% of GDP in 2015) and a pick-up in growth. Moody's expects the debt level to decline to 39.4% of GDP in 2015 (from 39.9% in 2014).
Notwithstanding the prospects for a more expansionary fiscal policy over the outlook period, Moody's forecasts the increase in Romania's debt burden to remain limited, and it is unlikely this will exceed 45% of GDP by the end of this decade thanks to Romania's robust GDP growth. In this context it is worth noting that Romania's medium-term growth outlook is more favourable than many of the country's peers, including Bulgaria (Baa2 stable), Spain (Baa2 positive), Azerbaijan (Baa3 stable), Portugal (Ba1 stable) or Hungary (Ba1 positive).
Romania's Baa3 government rating is supported by reduced fiscal deficits and a still comparatively low government debt-to-GDP ratio. In addition, Moody's expects that continued integration with the European Union (EU) will contribute to improvements in the country's institutional framework and capacity.
The country has made significant progress in correcting its macroeconomic imbalances as well as consolidating government finances. However, there is a risk that fiscal easing - as envisaged by Romania's new Fiscal Code - could lead to a deterioration of the government's fiscal outlook and the economy's price competitiveness, should wages grow persistently faster than labour productivity. Moody's expects that negative budgetary effects from fiscal policy easing will only partly be offset by higher economic growth and tax-broadening measures such as efforts to combat tax evasion. As a result, Moody's forecasts Romania's budget deficit to widen to 2.8% in 2016 and to 3.9% of GDP in 2017.
The Baa3 government rating also incorporates Romania's credit challenges stemming from the domestic banking sector's weak asset quality and restricted lending capacity, as well as contingent liabilities for the government arising from some state-owned enterprises.
Upward pressure on the rating could be exerted by a continuation of Romania's robust real GDP growth, improvements in the country's institutional framework and effectiveness, a prolonged stabilisation in government and external debt ratios, and/or a shift in the government debt structure that reduced refinancing risks.
Downward pressure on the rating could arise following evidence of a significant rise in the government's debt ratio and sovereign borrowing requirements, and/or a decline in external competitiveness and/or a deterioration in the balance of payments and international investment position.
On 08 December 2015, 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 increased. The issuer's institutional strength/ framework, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.