S&P maintains Romania’s stable outlook

International rating agency S&P affirmed the stable outlook for Romania’s sovereign ratings after it confirmed the rating itself a couple of weeks ago: namely BBB- for long-term foreign and local public debt, the weakest level in the investment-grade region.

The agency has delayed the decision on the outlook at the request of the Romanian Government, which took steps to revise controversial provisions included in the emergency ordinance (OUG) 114/2018 namely the so-called “greed tax”, the restrictive provisions pertaining the privately-managed pension funds, and supplementary taxes levied to energy, telecom and gambling industries. Separately from OUG 114, there were three banking laws outlined by S&P as threats to the sector’s sustainability, included in the initial country report on March 1. Furthermore, the 2009 budget planning was not promulgated until last week, and a new pension law (involving significant cost to the pension budget) had an uncertain future.

Out of the problems spotted by S&P in its March 1 report, the Constitutional Court rejected the three banking laws and returned the pension law to the lawmakers -- on grounds that can be addressed my minor amendments that would not diminish the additional budgetary cost involved. The OUG 114 remains in limbo, despite the Government’s promises to amend it.

The S&P stable outlook was issued based on assumptions, or promises made by the Government, that significant amendments would be brought to the OUG 114. Even so, a long list of threats to the macroeconomic stability is outlined by the agency, along with comments related to the widespread corruption -- an area that had not been covered until recently by the rating agencies as the country had made certain progress in this regard.

“Romania continues to suffer from corruption […] controversial legal reforms to weaken corruption charges and political interference in independent institutions risk weakening the rule of law and diminishing checks and balances,” the report reads. The Government’s policy is seen as “predominantly short term in nature.”

Structural reform initiatives are lacking, meanwhile, to the detriment of the ailing infrastructure network and under-performing education system. In terms of macroeconomic threats, economic slowdown, the widening budget deficit, and rising external deficit are seen as critical problems.

In 2019, S&P believes that economic growth will slow further to 3.5% due to softer external demand and weaker private investments, to moderate to a more sustainable 3.0% annually in 2020-2022.

As for the fiscal balance, S&P forecasts that Romania's headline general government fiscal deficits will widen to 3.3% and 3.5% of GDP in 2019 and 2020. These will be a result of the weakening growth momentum and the Government's spending measures as it prepares for the upcoming elections -- presidential in 2019 and parliamentary in 2020.

Despite this, Romania's public debt burden remains modest in an EU comparison (slightly below 40% of GDP by 2021). However, the Current Account Deficit (CAD) will remain around 4.5% of GDP on average through 2022. Positively, S&P observes that the funding of the CAD stems largely from stable, non-debt-creating inflows. For this reason, Romania's external debt net of liquid external assets will remain relatively low at around 30% of current account receipts (CARs), the rating agency says on a positive note.

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