Romania's ratings are supported by its healthier economic outlook, presently better fiscal position and more favourable governance indicators than 'BBB' range peers. However, the direction of fiscal loosening in 2016-2017 is a risk. The larger net external debt position than the 'BBB' median and structural weaknesses in the economy, remain moderate constraints on the rating.
Romania's public finances stand favourably against its 'BBB' range peers. A fiscal deficit 1.2% of GDP and public debt ratio 39.4% of GDP in 2015 compared with the 'BBB' medians of 2.7% and 42.7% of GDP, respectively. However, for 2016, Fitch is concerned that the pro-cyclical nature of the new Fiscal Code risks medium-term fiscal sustainability.
Fitch estimates that total tax cuts (including the 4pp cut in the standard rate of VAT to 20%) will decrease government revenues by 2.0% of GDP in 2016. This places strain on the structural fiscal deficit which the Romanian Ministry of Finance forecasts will widen to 2.7% of GDP in 2016 from 0.7% of GDP in 2015, and to 2.9% of GDP in 2017. This is based on ESA 2010 headline deficits of 3.0% and 2.9% of GDP in 2016 and 2017, respectively. Fiscal risks lie predominately on the downside.
The introduction of the Fiscal Code coincides with Romania's electoral calendar, with parliamentary elections expected in late 2016. As a result, some upward pressure on public expenditure appears probable and there is a chance that Romania would no longer be compliant with the preventive arm of the European Commission's Stability and Growth Pact. However, this is not necessarily incompatible with an investment grade rating. Meanwhile, under Fitch's baseline gross general government debt should remain under 45% of GDP over the medium to long term, in line with 'BBB' peers and significantly below the EU average.
Following the resignation of former Prime Minister Victor Ponta back in November 2015, Romania is now led by a technocratic government, under by Mr Dacian Ciolos. A successful confidence vote in November last year, with strong backing from Romania's two largest political parties, the Social Democrats and Liberals, means that Fitch expects this technocratic government to reach its full term until parliamentary elections in December 2016. Its presence should help contain further fiscal policy loosening, while maintaining the current economic policy.
Fitch forecasts Romania's economy will grow by close to 4% in 2016, well above the projected median growth rate of European and 'BBB' peers. Robust economic growth is being fuelled by strong domestic demand, stimulated by first round effects from the fiscal loosening policy.
Household consumption is expected to be the largest contributor to headline growth, as tax cuts under the fiscal code for 2016 will boost households' purchasing power in an environment of low inflation and higher minimum wages. Investment growth is also expected to stay positive.
The strong growth in domestic demand will more than offset the negative contribution we expect from net exports in 2016. For 2017, Fitch forecasts real GDP growth of 3.4%. Faster growth in imports over exports means Fitch forecasts a widening of Romania's current account deficit (CAD) to 1.7% of GDP in 2016 from 1.0% of GDP in 2015. This trend is projected to continue in 2017. FDI will cover the bulk of CAD financing.
In the wake of diverging global monetary policy, in particular tightening of Fed policy, there is a risk of capital outflow. However, so far there has been no sign of such volatility, and Fitch assesses this risk to be modest given the low share of non-resident holdings in RON-denominated government debt (18.6%).
Romania's banking sector has remained stable, despite volatility in the external environment. Banks are well capitalised (sector capital adequacy ratio at 18.7%, 3Q15), and since the Romanian National Bank encouraged the write-off and sale of bad loans back in 2014, NPLs have declined at a steady pace. For 2016, the positive macroeconomic environment will be favourable for Romania's banking sector.
Fitch anticipates an improvement in credit demand supporting banks' profitability, which remains under some pressure because of the low interest rate environment. Romania's ratings are constrained by a number of structural weaknesses, including the dominance of industry by inefficient state-owned entities and weak public infrastructure.
Structural bottlenecks constrain Romania's growth rate and convergence progress towards western European standards of living. GDP per capita at market exchange rates is low at 55% of the EU average. (source: actmedia.eu)
