Fitch Ratings affirmed Romania at ‘BBB-‘ with a stable outlook, citing EU membership and capital inflows as core supports. However, the rating agency warned that large twin budget deficits and a weak fiscal consolidation record threaten policy credibility and medium-term economic stability.
Credit Rating Affirmed Amid Persistent Deficit Pressures
Fitch Ratings affirmed Romania’s Long-Term Foreign-Currency Issuer Default Rating at ‘BBB-‘ with a Stable Outlook, the agency reported on Friday. The rating affirmation reflects a careful balancing act between the nation’s institutional ties to Europe and its mounting fiscal challenges.
According to the rating assessment, Romania’s ‘BBB-‘ rating is supported by EU membership and the resulting capital inflows that bolster income convergence, external finances, and macroeconomic stability. Furthermore, the country’s gross domestic product per capita, governance, and human development indicators remain above those of its ‘BBB’ category peers.
Structural Deficits and Fiscal Slippage Weigh on Outlook
Those underlying strengths are tested by significant structural vulnerabilities. The assessment highlights large twin budget and current account deficits relative to peers, alongside a weak record of fiscal consolidation, high budget rigidities, and a fairly high net external debtor position.
The budget deficit on ESA terms for 2023 reached an estimated 6.1% of gross domestic product, remaining practically unchanged from 2022 and landing well above the government’s initial 4.4% target. In response, Fitch revised up the deficit path over the medium term. This upward revision accounts for a less favorable starting position and significant legislated pension increases in January and September 2024, which carry an estimated fiscal easing impact of 1.8% of gross domestic product in 2025.
General government deficits are projected to hit 6% of gross domestic product in 2024 and climb to 6.4% in 2025.
EU Funds Drive Medium-Term Growth Projections
Economic growth slowed across the nation in 2023, mirroring a broader pattern seen in most European Union member states. Annual average gross domestic product growth settled at 2% for 2023 according to preliminary data, with growth forecasted at 3% for both 2024 and 2025.
The large inflows of EU funds, including cohesion funds from the new multiannual (2021-2027) financial framework and the recovery and resilience funds, will remain key drivers of growth and investment over the medium term.
“Beyond the direct demand stimulus, EU funds should also improve the growth potential of the economy, accelerating the catch-up towards the EU level.”
Fitch Ratings, via Actmedia
Policy Credibility and Downside Risks
Policy credibility faces hurdles from recent fiscal slippage and uncertainties surrounding post-election fiscal plans. While the re-introduction of European Union fiscal rules should help enforce discipline, substantial risks remain.
“We expect meaningful fiscal consolidation over the medium term, helped by the re-introduction of EU fiscal rules, although there are significant downside risks, given current uncertainties around post-election fiscal plans and recent fiscal slippage has negatively affected policy credibility.”
Fitch Ratings, via Actmedia
Future rating trajectory depends entirely on fiscal execution. Fitch says that failure to consolidate the fiscal accounts over the medium, leading to a significant increase in the public debt to GDP ratio, is a factor that could, individually or collectively, lead to negative rating action/downgrade, whereas sustained reduction of the budget deficit that supports a firm decline in public debt/GDP over the medium term is a factor that could, individually or collectively, lead to positive rating action/upgrade.
Insurance Financial Strength Ratings Also Affirmed in Separate Actions
In related ratings news from the broader financial sector, Moody’s Investors Service affirmed its A2 insurance financial strength rating for Fireman’s Fund Insurance Co. Moody’s also announced that its outlook for the Novato, Calif.-based insurer remains stable, which is consistent with the stable outlook of its parent company, Allianz SE.
In the announcement, Moody’s said key reasons for the affirmed rating are the company’s intrinsic business and financial fundamentals as well as implicit and explicit support provided by its parent company, Allianz SE, one of the world’s largest insurance groups (rated Aa3 for insurance financial strength).
Moody’s recognized its improved underwriting performance and business focus, its conservative investment profile and strong reinsurance protection, and its recognized brand identity in niche commercial (e.g. crop insurance) and high-end personal lines.
Fireman’s Fund Insurance Co. is a property and casualty insurance company providing personal and commercial insurance products nationwide. The company is a member of the Allianz Group, the world’s largest provider of property and casualty insurance by revenue.
