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Rating action

Scope Ratings GmbH (Scope) has today affirmed Romania’s long-term issuer and senior unsecured debt ratings in local- and in foreign-currency at BBB-. Scope has furthermore affirmed the short-term issuer ratings at S-2 in local- and in foreign-currency. All Outlooks remain Stable.

Summary and Outlook

The affirmation of Romania’s BBB- ratings reflects the following drivers:

1. Romania’s robust medium-term growth outlook, underpinned by the country’s relative resilience to recent energy and geopolitical shocks, as well as sizable EU fund inflows. Robust nominal growth also supports the country’s public debt trajectory, which Scope expects to rise only gradually in coming years, despite elevated fiscal deficits.
    
2. Expected policy continuity following elections at the local, parliamentary, presidential and European levels this year. This anchors Romania’s continued ability to absorb EU funds and pass reform to curtail, albeit at moderate pace, still-elevated general government fiscal deficits, which are projected to average 5% of GDP over 2024-2026, well above the 3%-Maastricht threshold. Romania’s rigid budget structure and long-term spending commitments are unlikely to facilitate significant fiscal consolidation over coming years.

The Stable Outlook reflects Scope’s view that risks to the ratings are balanced over the coming 12 to 18 months.

The ratings/Outlook could be upgraded if, individually or collectively: i) fiscal consolidation were strengthened, anchoring Romania’s debt-to-GDP trajectory; ii) external sector risks were curtailed, for example, via a sustained reduction in current account deficits, a build-up of foreign exchange reserves and/or tangible steps taken towards the adoption of the euro; and/or iii) the government’s capacity for reform were strengthened, including improvements in EU fund absorption.

Conversely, the ratings/Outlook could be downgraded if, individually or collectively: i) weaker fiscal metrics resulted in a further deterioration of the country’s public finance dynamics; ii) external vulnerabilities increased, including via elevated current account deficits, intensified financing pressures and/or shrinking international reserves; and/or iii) the ability to effectively absorb EU investment funds weakened, undermining macro-economic and public finance outlooks. 

Rating rationale

First driver of the rating affirmation: robust medium-term economic outlook, supported by EU-funded investment

Romania’s ratings are underpinned by the country’s robust medium-term economic growth outlook. This is driven by the considerable allocation of EU structural funds of a total EUR 60bn (around 21% of 2022 GDP) over 2021-27, which should support further income convergence to European levels over the medium-term. Romania’s total allotment via the EU Recovery and Resilience Facility (RRF) amounts to EUR 28.5bn (10.0% of 2022 GDP), EUR 14.9bn (5.2% of 2022 GDP) of which are in loans. In addition, Romania is set to receive around EUR 31bn (10.9% of 2022 GDP) in cohesion funds as part of the EU’s 2021-27 Multiannual Financial Framework. This sizable funding allocation will support the Romanian government’s reform agenda and investment programme, aimed at bolstering the Romanian economy’s digital and green transitions, and alleviating public funding pressures.

At the same time, Scope notes that the effective utilisation of these funds represents a medium-term challenge, in view of the country’s moderate track record with regards to EU funds absorption (90% of 2014-2020 European structural and investment funds were spent by end-2023). Romania’s track record in absorbing RRF funding has been broadly in line with the European average.

The Romanian economy grew by 2.0% in 2023, down from 4.1% in 2022. The growth slowdown in 2023 was more moderate than for most peers and was driven by weakening private consumption amid sharp price pressures (HICP inflation averaged 9.7% in 2023) and tight borrowing conditions, with the National Bank of Romania’s policy rate remaining stable at 7.0% since January 2023 following cumulative rate hikes of 575 basis points since September 2021. Scope expects real growth to rise to 2.7% in 2024, and to 3.5% in 2025, broadly in line with potential growth. This improvement will be driven by robust investment dynamics, underpinned by EU-funded public investment flows and progressively easing monetary policy, as well as by a pickup in private consumption, amid decelerating inflationary pressures. Downside risks to the growth outlook relate mainly to a slower-than-expected EU fund absorption or lower effectiveness of implemented projects to raise growth prospects, and weaker-than-expected external demand.

Second driver of the rating affirmation: expected policy continuity, EU fund absorption and reforms, still-moderate public debt and elevated fiscal deficits

Romania’s credit ratings are further supported by the country’s recent track record of political stability and implementation of reforms with the coalition government between the Liberal and Social Democrat parties stable since its inception in 2021. The government rotation took place as initially planned in the coalition agreement, resulting in the accession of Social Democrat Marcel Ciolacu to the premiership in June 2023. The current government has benefitted from a comfortable majority in both chambers of parliament, allowing it to pass reforms effectively.

The government rolled-out a fiscal package last year primarily aimed at raising the level of tax revenue, including through limiting exemptions for personal income tax and health insurance contributions. A reform to the pension system was furthermore adopted in November 2023, which, however, will increase annual expenditure over coming years by about 1.5% of GDP from 2025, but which may lead to cost savings in the long-run, according to the International Monetary Fund.

Scope notes that elections at the local, parliamentary, presidential and European levels this year may limit the authorities’ ability to implement further fiscal consolidation measures, resulting in a temporary delay of the roll-out of policies included in Romania’s RRP. Latest opinion polls point to a continuation of the current grand coalition supporting Scope’s expectation of broad policy continuity after the elections, which should ensure the country’s continued absorption of EU funds and additional measures to consolidate its public finances, and improve its business environment and efficiency of public administration.

Still, given Romania’s rising structural expenditure pressures, it would be credit negative should the authorities delay reforms to increase Romania’s receipts from taxes and social contributions (27.5% of GDP in 2022), which remains one of the lowest among EU member states.

Looking ahead, the debt-to-GDP ratio is expected to rise gradually to 50.5% at YE 2024 (expected 49.2% at YE 2023), up around 15pp of GDP from its pre-pandemic level of 35.1% at YE 2019, and to continue rising to around 55.5% by 2028. While that projected debt level would still be moderate vis-à-vis similarly-rated peers, the structural upward debt trajectory driven by high primary deficits and moderately rising interest costs, which are only partially offset by strong-medium term nominal growth prospects, is a key credit challenge.

Rating challenges: high fiscal deficits; elevated current account deficits with moderate, albeit rising, international reserves

Romania’s credit ratings are constrained by: i) a rigid budget structure and comparatively weak tax base, which limit the pace of fiscal deficit reduction; ii) high current-account deficits, resulting from fiscal imbalances and weaker competitiveness relative to regional trading partners, and a relatively moderate, albeit rising, level of international reserves relative to foreign-currency liabilities. International reserves stood at around EUR 68bn in January 2024, up from around EUR 52bn at YE 2022. This has also led to an improvement in reserve adequacy, with reserve coverage of short-term external debt at 97.4% at YE 2023, up from 82.4% at YE 2022, and close to the IMF’s 100% adequacy threshold. 

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s SQM, which assesses core sovereign credit fundamentals, signals a first indicative credit rating of ‘bbb’ for Romania. Under Scope’s methodology, the indicative rating receives i) no positive adjustment from the methodological reserve-currency adjustment; and ii) no negative adjustment from the methodological political-risk quantitative adjustment. On this basis, a final SQM quantitative rating of ‘bbb’ is reviewed by the Qualitative Scorecard (QS) and can be changed by up to three notches depending on the size of Romania’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states.

Scope identified the following QS relative credit strength for Romania: i) growth potential and outlook. Conversely, the following credit weaknesses have been identified in the QS: i) fiscal policy framework; ii) long-term debt trajectory; iii) current account resilience; iv) resilience to short-term external shocks; and v) social factors. On aggregate, the QS generates a one-notch negative adjustment for Romania’s credit ratings, resulting in final BBB- long-term ratings. A rating committee has discussed and confirmed these results.

Factoring of Environment, Social and Governance (ESG)

Scope explicitly factors in ESG issues in its ratings process vis-à-vis the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weighting under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

Environment-related credit risks remain material for Romania. The comparative dependence of the Romanian economy on energy-intensive production presents a challenge for policymakers under tightening financing conditions and needed economic transitions towards the green economy. Romania has estimated investment needs of around EUR 150bn (7% of GDP annually) to achieve its climate objectives through 2030. EU investment funds represent a critical opportunity for Romania to increase the production of renewable energies and facilitate the transition to a lower-carbon economy. Romania is much less dependent on Russian energy sources than its regional peers due to local production and is expected to increase investment in offshore gas production in the Black Sea. Under the qualitative assessment of environmental factors, Romania is assessed as neutral compared with its sovereign peers.

Social factors are characterised by a rapidly increasing old-age dependency ratio, elevated income inequality and low labour force participation rate (66.8% as of 2022). Net emigration remains a key hindrance to the long-term growth outlook, despite the moderation in net emigration flows in recent years (at 16,000 people in 2021, from 76,000 in 2016). The large inflow of Ukrainian refugees led net migration to turn positive in 2022 (around 85,000). Under the qualitative assessment of social factors, Romania is assessed as weak compared with its sovereign peers due to Romania’s high poverty rate and high risk of social exclusion.

Regarding governance-related factors, Romania’s performance is weaker than that of central and eastern European EU peers, as assessed under the World Bank’s Worldwide Governance Indicators. Romania has a history of unstable governments, contributing to years of expansionary fiscal policies around electoral periods and a relatively weak absorption of EU funds. Nonetheless, Romania’s EU membership enhances economic governance. External security risks for Romania have increased since the further escalation of the war in Ukraine, a neighbouring country, but Romania’s NATO membership represents a strong security umbrella. Under the qualitative assessment of governance factors, Romania is assessed as neutral compared with its sovereign peers.

Rating committee
The main points discussed by the rating committee were: i) fiscal fundamentals and debt trajectory; ii) macroeconomic sustainability and growth performance; iii) financial stability risks; iv) EU funds and past absorption of EU resources; v) external sector dynamics; and vi) governance factors.

Methodology
The methodology used for these Credit Ratings and/or Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and/or Outlooks (Sovereign Quantitative Model, Version 3.0) is available in Scope Ratings’ list of models, published under https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation      NO
With access to internal documents                                   NO
With access to management                                            NO
The following substantially material sources of information were used to prepare the Credit Ratings: public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings and/or Outlooks were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Julian Zimmermann, Associate Director
Person responsible for approval of the Credit Ratings: Alvise Lennkh-Yunus, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 17 March 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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