Scope downgrades Romania's sovereign ratings to BBB-

The continued deterioration of fiscal performance and weak debt trajectory drive the downgrade, while the Negative Outlook was strengthened by the sustained policy uncertainty, Scope Ratings says. The country's high growth potential and moderate levels of debt support the BBB- rating. 

The wedge between fiscal revenues and expenditures has increased significantly following frequent tax cuts over the past few years. The situation got worse due to Romania's tax collection system, which is one of the most inefficient in the EU. In addition, while expenditures remained broadly stable as a percentage of the GDP in 2017, the budgetary composition has deteriorated, with an increase in consumption and salaries (0.8 percent of the GDP) at the expense of much-needed public investment, reads the release. 

The affirmation of the Negative Outlook on Romania's BBB- ratings reflects the ongoing political uncertainty and the associated risk of losing institutional credibility with investors given the sustained reluctance of the government to address repeated warnings by the National Fiscal Council and European institutions on unfavourable developments in public finances, reads the release. 

In Scope's view, the recent confrontation between the government and EU officials on a rollback of anti-corruption reforms has contributed to a further weakening of the Government's credibility. Thus, increasing political uncertainty and deteriorating institutional credibility raise the risk of the sovereign losing the market's confidence at a time when the economic cycle is turning, exposing risks associated with financing Romania's fiscal and external imbalances. 

At the same time, the BBB- rating acknowledges that Romania has been one of the fastest growing economies in the EU, with real annual GDP growth averaging 4.8 percent over the last four years and reaching a peak of 6.9 percent in 2017. 

This development has led to a strong convergence of income, although purchasing power-adjusted GDP per capita remains far below the EU-28 average (62% of the average in 2017). However, economic activity lost momentum in 2018 due to conjunctural external and domestic factors. 

Scope Ratings Believe that Romania's upward growth potential remains limited given the large skills mismatch in the labour market and relatively low absorption of EU funds, combined with the low predictability of domestically legislated infrastructure projects. 

This situation also reflects the lack of effective local bureaucracy and officials' management abilities and is one of the reasons for Scope's affirmation of the sovereign's Negative Outlook. 

Romania benefits from a positive investment grade, from the three financial assessment agencies. Thus, Standard & Poor's (S & P) recently confirmed the long-term and short-term foreign currency and local currency ratings of Romania at "BBB- / A-3", with a stable associated outlook. Moody's affirmed Romania's Baa3 issuer ratings, while Fitch Ratings affirmed Romania's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-.'

AGERPRES