Reuters logo
Fitch Affirms Romania at 'BBB-'; Outlook Stable
July 14, 2017 / 8:10 PM / 5 months ago

Fitch Affirms Romania at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 14 (Fitch) Fitch Ratings has affirmed Romania's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with Stable Outlooks. The issue ratings on Romania's senior unsecured foreign- and local-currency bonds have also been affirmed at 'BBB-'/F3. The Country Ceiling has been affirmed at 'BBB+' and the Short-Term Foreign- and Local-Currency IDRs at 'F3'. KEY RATING DRIVERS Romania's investment grade rating is supported by its still moderate level of public debt, stable banking sector, and GDP per capita and governance indicators that are in line with 'BBB' range medians. However, the rating is facing an increase in downside risks owing to a substantial pro-cyclical fiscal loosening and rapid increase in wages in excess of productivity growth, which pose risks to macroeconomic stability. Romania's general government budget deficit widened to 3% of GDP in 2016 from 0.8% in 2015, despite the booming economy. The increase was due to large tax cuts and increases in public wages and social welfare payments. Fitch projects the deficit will widen to 3.7% of GDP in 2017, above the government's target of 2.9%, owing to further cuts in VAT and excise rates, and increases in public wage, pensions and other measures. Outturns for the first five months of 2017 show an underperformance in tax receipts of goods and services and corporate income, and the budget deficit (cash basis) RON1.4 billion wider year-on-year, despite rapid economic growth and low execution of capital expenditure. The structural budget deficit is set to widen to 3.9% of GDP in 2017, according to the European Commission, which would represent an expansion of 3.3% of GDP in two years, contrary to national and EU fiscal rules. Romania is at risk of re-entering the EU Excessive Deficit Procedure this year, having only exited it in 2013. In Fitch's view, there is a high level of uncertainty over the outlook for the budget deficit over 2017-2019 owing to an incompatibility between further expansionary fiscal measures in the government's programme and its budget deficit targets of 2.9% in 2018 and 2.5% in 2019. The recently approved Unified Wage Law involves a 25% hikes in public sector wages (more for the health and education sectors), albeit potentially partially offset by a shift in social security contributions to employees from employers effective January 2018. Other proposals include a net 23% increase in the minimum wage in 2018, a potential cut in the personal income tax rate to 10% from 16%, increased pensions and child benefits, a further cut in VAT (in 2019), changes to the corporate and personal income tax structure and the creation of an off-budget sovereign investment fund to increase investment in infrastructure and state owned enterprises. Further tax cuts would risk eroding the revenue-to-GDP base, which is the lowest in the EU. Taking advantage of EU structural funds would require an increase in the amount and quality of infrastructure expenditure. Fitch forecasts the budget deficit at 4% of GDP in 2018 and 2019. Nevertheless, Romania's general government debt/GDP ratio remains in line with the median 41% ratio of 'BBB' rated peers. Fitch forecasts it to increase to 39.9% of GDP by end-2017 from 37.6% in 2016. Debt repayments are moderate, averaging 3.5-4.0% of GDP annually up until 2019, and the government holds an adequate cash buffer equivalent to 3.6% of GDP, covering 5.1 months of gross financing needs. Economic growth is boosted by the fiscal stimulus. For 2017, Fitch has revised up its real GDP forecast to 5.1% from 4.8% previously, after a stronger than expected 1Q17, when GDP expanded 5.7% yoy (1.7% qoq). Growth is mainly consumption driven, led by households benefiting from robust growth in real wages. Import growth remains strong, but recovery in demand from Romania's key export partners helped net exports contribute positively to Q1 GDP, albeit at a modest level (0.2pp). Contribution from gross fixed capital formation remained negative. Fitch expects growth to ease to 3.4% in 2018 as the magnitude of the fiscal stimulus fade. There is a risk of the economy overheating, although inflation and bank credit growth are currently subdued. The National Bank of Romania estimates that the economy is already operating around 2% above potential and this will increase as actual GDP growth outstrips potential growth, which most independent institutions estimate at around 3.5%. The labour market is tight, with unemployment at a record low and hikes in the minimum wage and public wages have contributed to average wages outstripping productivity growth by a large margin leading to rising unit labour costs. Against this background, Fitch forecasts the current account deficit to widen from 2.3% of GDP in 2016 to 3.1% in 2017 and 3.3% in 2018. Progress in converging Romania's GDP per capita levels towards that of higher rated peers has been slow, despite robust economic growth as the economy still faces structural challenges improving the efficiency of state-owned enterprises and absorption of EU-funds into economically viable projects. Romania's rating is constrained by its net external debtor position, which Fitch estimates at 18.9% of GDP for 2016, higher than the 'BBB' median estimate of 2%. Nevertheless, net external debt/GDP is declining, with the majority owed by the private sector and relating to intercompany lending. Romania's ratings are supported by a stable banking sector. Banks are well capitalised (sector capital adequacy ratio 18.8%, 2016), sufficiently funded by local deposits and their balance sheets continue to improve as the share of non-performing loans declines. Legislative risks to the sector have stabilised following a favourable ruling by the Constitutional Court on the Debt Discharge Law and CHF loan conversion, diminishing the risk of a large financial cost for the sector. Recent political developments risk weakening governance indicators and government policy direction. In June, former prime minister Sorin Grindeanu was ousted by his own party in unusual circumstances, ostensibly for slow progress in implementing the government programme. The PSD-ALDE coalition policies will now be carried through by new prime minister, Mihai Tudose of PSD. This includes the controversial Penal Code, which would result in pardoning certain crimes of those abusing powers in office, and which triggered large public demonstrations against the government in January. 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 FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows: - External Finances: -1 notch, to reflect Romania's significantly higher net external debtor position than the 'BBB' median, and lower international liquidity ratio than the 'BBB' median. 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. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are: - Persistent high fiscal deficits leading to an increase in government debt/GDP. - An overheating of the economy that poses a risk to macroeconomic stability. The main factors that could, individually or collectively, trigger positive rating action include: - Implementation of fiscal consolidation, which improves the long-term trajectory of public debt/GDP. - Sustained improvement in external finances. KEY ASSUMPTIONS Fitch assumes Romania's main economic partners in the EU will benefit from economic growth in line with its Global Economic Outlook. Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ed Parker Managing Director +44 20 3530 1176 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below