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The credit rating agency S tandard & Poor’s maintains Romania’s rating at BBB- / A-3, but the outlook remains negative. “We estimate that the economy will contract by 5.2% in 2020 and the fiscal deficit will be 9.2%. In our baseline scenario, we expect that after the December parliamentary elections, the new government will make credible consolidation efforts to stabilize public debt below 60% of GDP, ”the document reads.
The negative outlook is based on the risks of the fiscal and external balances during the next 12 months. They are likely to materialize if policy-makers do not come up with a credible plan to reduce fiscal imbalances.
“We could downgrade Romania if fiscal and external imbalances remain higher than we currently anticipate, for example due to the challenges of fiscal policy formulation after the next elections. In our opinion, financing costs they could increase if the new government fails to present a credible fiscal policy framework, “S&P said.
We could review the stable outlook if the new Romanian government quickly anchors fiscal consolidation, leading to a stabilization of external public finances.
- We believe that any upcoming administration will continue to provide broad fiscal support to encourage economic recovery during 2021. That said, it should, and possibly renounce, the rigidities created by previous political decisions. These include costly increases in pensions and other social benefits. Political uncertainty is compounded by the conflictive and complex political landscape, which makes it difficult to form a coalition after the December elections.
- The implementation of a balanced and credible fiscal agenda will be essential to support the economic recovery and maintain financial market confidence.
- We estimate that the Romanian economy will contract by 5.2% in 2020 before returning by 4% in 2021.
- The absorption of European funds will be key to help economic rebalancing, although there are implementation risks.
- We anticipate that the economy will return to the level of 2019 only in 2022.
- In response to the effects of the quarantine, the authorities have put in place a series of fiscal and economic measures to protect companies. We estimate the size of the fiscal stimulus package at 3% of GDP.
“Since salary and pension expenditures now represent around 90% of tax revenue, Romania’s budget structure is extremely rigid. Although not part of the baseline scenario, if the 40% increase in pensions were to be implemented, we estimate that only spending on salaries and pensions would exceed government tax revenue in 2021. We do not expect the government to tighten fiscal policy until 2021 to try to encourage economic recovery, “the source said.
- However, we believe that the authorities will seek to adjust the structural composition of the budget, making spending less rigid and improving revenue collection, while moving towards a gradual reduction of the deficit.
- We anticipate a deficit of 7.2% of GDP in 2021 and a reduction to 5.5% in 2022.
- We expect Romania’s current account deficit to reach 5% of GDP in 2023. In our opinion, the growing trade deficit demonstrates the problems of competitiveness.
