Moody’s Ratings on Friday (March 14) revised the outlook for the Government of Romania to negative from stable, while affirming its long-term Issuer and Senior Unsecured Ratings at Baa3. The Senior Unsecured MTN Rating is also affirmed at (P)Baa3, and the short-term issuer ratings remain at Prime-3.
The shift to a negative outlook is driven by concerns over Romania’s fiscal trajectory. Moody’s anticipates a persistent fiscal deficit, projected to remain at 7.7% of GDP in 2025, with only gradual improvement thereafter. This trajectory is expected to push the government debt burden to 68.5% of GDP by 2028, significantly impacting debt affordability. Without substantial fiscal consolidation measures, Romania’s credit profile could weaken materially compared to its Baa3-rated peers.
The affirmation of the Baa3 ratings reflects Romania’s moderate economic size and growth potential, as well as its relatively high wealth levels. However, the country’s credit profile is constrained by its vulnerability to event risks, particularly geopolitical risks stemming from its proximity to the conflict in Ukraine, the credit rating agency said.
Romania’s long-term local and foreign-currency country ceilings remain unchanged at A2. The four-notch gap between the local currency ceiling and the sovereign rating is attributed to a moderate government footprint in the economy, moderate predictability of government actions and reliability of key institutions, and moderate political and external vulnerability risks. As a member of the European Union (EU, Aaa stable), Romania benefits from regular fiscal and macroeconomic policy assessments by the European Commission, and strong trade and investment linkages mitigate the risk of transfer and convertibility restrictions, Moody’s said.
Rationale for Changing the Outlook to Negative from Stable
The negative outlook reflects the risk of significant fiscal weakening without further consolidation.
Moody’s projects a persistent high deficit, reaching 7.7% of GDP in 2025, driving government debt to 62.7% by 2026, from 48.9% in 2023. Interest payments are expected to rise from 5.7% of revenue in 2023 to over 9% by 2029, weakening debt affordability. Current measures, including public sector wage and pension indexation freezes, are deemed insufficient for planned deficit reduction targets. Achieving these targets requires stronger growth and improved fiscal management, potentially through a delayed tax reform under the NRRP. Political instability following recent elections and rising geopolitical risks, including increased defense spending pressures, complicate fiscal consolidation efforts. The delayed tax reform and political instability increase the risk of the fiscal situation worsening, the international agency said.
Moody’s downgrade of Romania’s outlook to negative signals potential financial turbulence, with significant implications for businesses and markets. Higher borrowing costs could result from increased yields on Romanian government bonds, making loans more expensive for businesses and limiting expansion and investment opportunities. Additionally, currency and investment risks may emerge as the Romanian leu (RON) faces downward pressure amid declining investor confidence, potentially discouraging foreign direct investment (FDI). Meanwhile, stock market volatility is expected to rise, with Romania’s BET index and other financial assets reacting to heightened economic uncertainty. Given these challenges, businesses should prepare for a more constrained financial environment.
