Fitch Affirms Romania at 'BBB-'; Outlook Negative

  Fitch Ratings has affirmed Romania's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB-' with a Negative Outlook.   Key Rating Drivers   Structural Strength and Weaknesses: Romania's 'BBB-' rating is supported by EU membership and related capital inflows that support income convergence, external finances, and macro stability. GDP per capita, governance and human development indicators are above 'BBB' category peers. These strengths are balanced against the large and persistent twin budget and current account deficits, deteriorating debt dynamics, weakened policy credibility amid elevated political uncertainty and a fairly high net external debtor position.   The Negative Outlook reflects the combination of significant deterioration of public finances and a marked growth slowdown in 2024 and the likely adverse effect of heightened political uncertainty on fiscal consolidation prospects.   High Political Uncertainty: Political uncertainty has surged since late 2024. The Constitutional Court annulled the presidential election due to alleged foreign interference following populist candidate Calin Georgescu's surprise first round victory. The new presidential election is set for May 2025, with the Constitutional Court's candidate eligibility decisions, including that of Mr. Georgescu given ongoing investigations, due by mid-March.   New Parliament, New Government: The 1 December 2024 parliamentary elections yielded a more divided parliament, mirroring Romania's growing social polarisation. A pro-European coalition of three parties was quickly formed and the government announced fiscal consolidation measures and passed the 2025 budget in January. In our view, the coalition's durability is uncertain and political pressures will remain elevated, especially during the presidential campaign, possibly delaying additional fiscal consolidation measures until 2H25.   Record High Budget Deficit: Romania's general government deficit was 8.7% of GDP in 2024, according to preliminary cash data. This was the highest among 'BBB' rated sovereigns and surpassed both the government's earlier target (5% in the Spring 2024 Convergence Programme) and the 6.5% 2023 fiscal outturn. The greater-than-expected fiscal deterioration mainly reflects rapid expenditure growth, including public sector salaries and unfunded pre-election pension increases. The full year impact of the September 2024 pension increase will add to fiscal pressures this year, making consolidation even more challenging.   Fiscal Consolidation Challenges, Trade-Offs: The government aims to cut the budget deficit to 7% of GDP in 2025, meeting the European Commission's target. Key measures include tighter expenditure control, including wage and pension freezes, and improved tax collection. We forecast a deficit of 7.5% of GDP in 2025 and 6.8% in 2026, more than double the current projected 'BBB' median averaging 3.2% in 2025-2026. Fiscal consolidation may face difficult trade-offs over the medium term due to its potential adverse impact on already subdued economic growth and the risk of financial market volatility pushing up interest costs, further weakening the fiscal position.   Increasing Public Debt: Our forecast indicates a steeper upward slope of the debt trajectory compared with previous years as primary deficits remain large and economic growth slows. In our baseline scenario, the general government debt to GDP ratio will increase from an estimated of 53% in 2024 to close to 60% in 2026, above the projected 'BBB' current median of 56%, and continue to increase to above 65% of GDP by 2028.   Weak Economic Growth: The economy's momentum gradually slowed during 2024 with average GDP growth of 0.9%, compared with 2.4% in 2023 and 4% in 2022. Exports have been particularly weak in 2024, partly due to adverse sectoral shocks, while household consumption held up, due to strong income growth, fuelled by the loose fiscal stance. We forecast a subdued recovery of 1.4% and 2.2% GDP growth in 2025 and 2026, respectively, given the weak cyclical position, the negative fiscal impulse and less pronounced recovery in the eurozone.   Wide External Imbalances: The current account deficit (CAD) widened to 8.2% of GDP in 2024 from 6.6% in 2023, underpinning the twin deficit problem. The 'BBB' median CAD is only 1% of GDP, making Romania a clear outlier. In addition to continued import growth, the weak export performance in 2024 highlights the external competitiveness challenges of the Romanian economy reinforced by rapid nominal wage growth. Net external debt will increase from an estimated 14% in 2024 to 19% of GDP in 2026, significantly above the projected 3% for the 'BBB' median, from 12% in 2023.   Deteriorating Funding Conditions: Romania enjoyed generally favourable market conditions and ample market liquidity until October 2024. However, financing conditions have deteriorated in recent months, due to increased domestic fiscal and political risks and large financing requirements. Romania issued three Eurobonds in February 2025 with five-, nine- and 12-year maturities, for a total EUR4.1 billion, approximately 30% of its planned annual external issuance. Given increasing debt and marginal yields, we forecast the interest payment to revenues ratio to increase to close to 8% of revenues by 2026 from 6.4% in 2024, exceeding the 7.5% peer median.   Sound Banking Sector: Romania's banking sector is well-capitalised (total capital ratio of 25.0% at end-3Q24), profitable (annualised 9M24 return on assets at 1.9%), and liquid, with funding primarily from granular local customer deposits. Despite economic challenges, asset quality has remained sound, with a non-performing loans ratio at 2.4% at end-November 2024. Profitability will likely stay strong for larger banks in the next two years, only slightly below the strong 2023-2024 results, while the turnover tax remains a challenge for smaller banks.   ESG - Governance: Romania has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model (SRM). Romania has a moderate WBGI ranking at 60 percentile, reflecting a recent record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption.   RATING SENSITIVITIES   Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade   Fiscal: A continued rapid increase in government debt over the medium term, for example, due to failure to implement measures that support sustained and credible fiscal consolidation, or weak economic growth.   Macro/External: Evidence of adverse spill-overs to external financing and liquidity, or macroeconomic stability, stemming from high twin fiscal and CADs or domestic political shocks.   Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade   Fiscal: Greater-than-projected fiscal consolidation that supports stabilisation of public debt/GDP over the medium term.   External: Reduction in external indebtedness and external financing risks, stemming from a structural improvement of the CAD.   Sovereign Rating Model (SRM) and Qualitative Overlay (QO)   Fitch's proprietary SRM assigns Romania a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale.   Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows: - External Finances: -1 notch, to reflect higher external vulnerability than implied by the SRM, given the large CAD and higher net external debtor and net investment liabilities positions than the 'BBB' current medians.   Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.   Country Ceiling   The Country Ceiling for Romania is 'BBB+', 2 notches above the LT FC IDR. This reflects strong constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.   Fitch's Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. Fitch's rating committee applied a further +1 notch qualitative adjustment to this, under the Long-term Institutional Characteristics pillar, as we view trade and financial integration as stronger than the model output, supported by EU membership.   REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING   The principal sources of information used in the analysis are described in the Applicable Criteria.   ESG Considerations   Romania has an ESG Relevance Score of '5[+]' for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Romania has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.   Romania has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch's SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Romania has a percentile rank above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.   Romania has an ESG Relevance Score of '4[+]'for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver. As Romania has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.   Romania has an ESG Relevance Score of '4[+]' for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Romania, as for all sovereigns. As Romania has a track record of 20+ years without a restructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.   The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision.  (Source:https://www.fitchratings.com/)