Romania's rating: Fitch sees us walking the wire

Fitch revised the outlook of our country's long-term foreign currency credit rating from "stable" to "negative" and maintained the rating at "BBB-", in a climate marked by political uncertainty, expectations of a more severe budget deficit than previously estimated, higher public debt and lower economic growth, as evidenced by the agency's announcement.

Finance Minister Marcel Boloş stated that Fitch's assessment represents an alarm signal for now, with fiscal-budgetary consolidation measures being necessary for our country to return to the "stable" outlook it had before the crisis on the political scene.

"We have a "negative' perspective that, somehow, raises an alarm signal about the current period we are going through, generated by the fragmentation of the decision in Parliament and the formation of the Government, which are the guarantees so that we can take measures for fiscal consolidation," said the Minister of Finance, before the Government meeting, quoted by News.ro.

• Mircea Coşea: "Fitch's decision depreciates the image of our country, which may lead to a delay in foreign investments and higher interest rates"

Economics professor Mircea Coşea blames the rating agency's decision mainly on the political instability and the lack of a clear direction of our country, with an impact on the economy.

He told us: "For me, it is very bad news because, with all the difficulties that the Ministry of Finance has brought us, with all the taxation, the business environment has managed to cope in such a way that the economy has not entered a recession. We have high inflation, loans, but we have maintained a certain balance and we hoped that things would go for the better. Unfortunately, this "negative" assessment is not caused by the Romanian economy but by Romanian politics. This is because, mainly, the assessment is based on political instability, on the incapacity of today's political decision-makers, who still want to lead by trying to form a Government by gathering what was left with what can still be completed after these elections that clearly showed that a change is needed. It seems that they did not understand that a change is needed".

Mircea Coşea added: "The fact that there is no clear vision of the future, that we are entering a prolonged electoral campaign, because we do not know when the president will be elected, all this means a lack of predictability. I think that Fitch has mainly observed political instability, lack of predictability and especially the lack of a firm orientation of the direction in which we are going. Unfortunately, the policy promoted by the current decision-makers is a brake on the development of the Romanian economy at a more serious pace and in a better quality sense. A change is needed that will lead to a new governmental concept, to a profound reform of the structure of the Romanian economy, which above all must be credible."

• "The planets have aligned, but in a negative way for us", says Mircea Coşea

According to the economics professor, Fitch's decision depreciates the image of our country in the international economic world, which may lead to a delay in foreign investments or even the withdrawal of some of these investments and an increase in the cost of credit, meaning higher interest rates.

"We also expect a firmer position from the European Union regarding compliance with the criteria in the PNRR and the 7-Year Fiscal Program", says Mircea Coşea, who also points out that there may also be problems related to the orientation of the new American administration because Donald Trump's statements are not favorable to Europe and, implicitly, Romania.

"The planets have aligned, but in a negative way for us, and the Fitch rating is just a statement of the situation we are in," says the economics professor, adding: "It is a great pity that our political decision-makers have an attitude that creates a lack of predictability and does not stimulate the economy. Let's not expect things to improve in the coming months because I believe that political instability will continue."

• Ionuţ Dumitru: "We have a coalition in the process of formation but we do not have concrete measures to address the major budget problem"

Ionuţ Dumitru, Raiffeisen Bank's chief economist, believes that Fitch's decision was somehow predictable in the context in which our country finds itself, with major political uncertainties and, at the same time, a very serious budget problem.

"There are high expectations that the Government will come up with concrete measures for fiscal-budgetary consolidation to bring public finances back into a sustainable zone. This is because we now have a big problem, with a budget deficit of over 8% of GDP and a public debt that is growing very quickly. Under these conditions, expectations are clear in the direction of adjustment measures. However, what we see so far does not meet the expectations of the financial markets and the rating agencies. We have a coalition in the process of formation but we do not have concrete measures to address the major budget problem", Ionuţ Dumitru told us.

The economist added: "It is important that the rating has not changed. Romania still has an "investment-recommended" rating, but the direction is rather downward, in the event that corrective measures are not taken. If the government implements credible fiscal-budgetary adjustment measures and the political situation stabilizes, we will probably have a return to the "stable" outlook within a six-month-one-year horizon. This involves reducing deficits, stopping the growth of public debt, measures that change the direction of public finances from an unhealthy one to a healthy one."

According to Minister Boloş, the fiscal-budgetary consolidation measures will be discussed in the governing coalition and will be found in the future trenulet ordinance.

• Fitch: "The elections resulted in a more divided Parliament, marked by the increased presence of far-right, anti-EU parties, reflecting the growing polarization of Romanian society"

The rating agency Fitch notes in its report that political uncertainty in Romania has reached high levels, and in its assessment this is likely to have a significant negative effect on fiscal consolidation.

"The presidential election process was annulled by the Constitutional Court after the surprising first-round victory of ultranationalist candidate Călin Georgescu due to alleged foreign/Russian electoral interference. The Constitutional Court extended the mandate of the current President, Klaus Iohannis, which was due to end on 21 December 2024, until the election of a new president," the agency's report says.

Fitch also notes that the parliamentary elections, held after the first round of the presidential elections, resulted in a more divided Parliament, marked by the intensification of the presence of far-right, anti-EU parties, reflecting the growing polarization of Romanian society. "A new pro-European coalition government, composed of four parties, is likely to be formed before the end of 2024. However, the sustainability of such a coalition is uncertain and new presidential elections, which could be scheduled for March 2025 at the earliest, will keep political uncertainty high. In our view, this will also likely delay the implementation of fiscal consolidation measures," the Fitch report says.

• "The fiscal deterioration above expectations mainly reflects the rapid growth of spending, including public sector wages and pensions," according to Fitch

The rating agency estimates that Romania's budget deficit will increase to 8.2% of GDP in 2024, above its August forecast of 7.2%. "The fiscal deterioration above expectations mainly reflects the rapid growth of spending, including public sector wages and pensions. The full-year impact of the September 2024 pension increase will make fiscal consolidation even more difficult," the report said. "While we assume that fiscal consolidation will begin in 2025, we have revised our budget deficit estimate to 7.5% of GDP in 2025 and 6.8% in 2026," Fitch wrote.

In the rating agency's opinion, fiscal consolidation is likely to face the potential negative impact on already low economic growth and the risk that financial market volatility will increase interest costs, further weakening our country's fiscal position.

• The rating agency estimates the increase in our country's public debt from 49% of GDP in 2023 to 62% in 2026

Fitch anticipates an increase in public debt from 49% of GDP in 2023 to 62% in 2026, above the median estimated for the "BBB" rating of 56%, and which will continue to increase to about 70% of GDP in 2028.

It also anticipates the increase in the current account deficit to 8% of GDP in 2024, from 7.3% in 2023, compared to the rating average of only 1%. "The weak export performance in 2024 highlights the external competitiveness challenges of the Romanian economy," the report said, adding that net external debt will increase from 12% in 2023 to 20% of GDP in 2026, significantly above the 3% level estimated for the "BBB" median of 12% in 2023.

The agency has revised down its GDP growth forecast for our country for 2025 and 2026, to 1.4% and 2.2%, respectively, according to the report.

The next Fitch rating review for our country is in February next year, but the agency believes that events in Romania will lead to a deviation from this schedule.