Fitch reconfirmed the rating for Romania on Friday, 12 January, at BBB- with stable outlook. Positive aspects that indicate this rating for Romania are the moderate level of public debt and certain economic indicators (like GDP per capita) which match this rating.
Country ceiling for Romania was confirmed at BBB+, and the short-term rating for foreign and local currency was confirmed at F3 level.
However, the rating agency also warned on the tax loosening policy and the rapid increase in wages in excess of productivity growth. “Expansionary fiscal policy has weakened Romania’s public finances”, stated the agency. Although fiscal performance of 2017 was flattered by strong economic growth, the agency believes this cannot be sustained on the long term.
Tax cuts may influence rating for Romania in near future
Tax cuts decreased Romania’s revenue-to-GDP ratio to one of the lowest in the region. While significant increases in minimum wages, public sector salaries and pensions raised underlying expenditure, putting significant pressure on the country’s economy for 2018. For example, a cut in income tax rate from 16% to 10% as of 1 January 2018 is expected to reduce revenue by 1.5% of GDP.
This is a measure which the Romanian government plans to offset by changes in the VAT payment system (i.e. split VAT payment system).
Debt to GDP ratio increased to 38% at end of 2017, from 37.6% in 2016 according to Fitch’s estimates, but it remains below the “BBB” range median of 40.9%. Upcoming debt repayments are moderate in 2018 and 2019, respectively. In addition, the authorities hold an adequate FX cash buffer covering approximately 3.8 months of financing needs.
Uncertainty surrounding law reforms remains a risk to Romania’s governance indicators, which currently stand in line with the ‘BBB’ peer median. The approval in December 2017 of certain law amendments which are suspected of weakening judicial independence, triggered public protests and criticism from EU member states.
More details regarding Fitch analysis on rating for Romania can be found here.