NEGATIVE RATING OUTLOOKStandard & Poor's says that we are going downhill

Emilia Olescu ( (TRANSLATED BY COSMIN GHIDOVEANU)
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Standard & Poor's says that we are going downhill

Even though S&P expects that next year we will begin a process of significant fiscal consolidation, the rigid structure of the budget and the volatility of the political environment represent risks to this hypothesis 

Standard & Poor's (S&P) has worsened our rating outlook from stable to negative as a result of the growing budget deficit. In this context, our country will borrow at higher costs, and business people will think twice before investing in the domestic economy, which will be more vulnerable to external shocks, they claim.

The S&P report shows: "The deviations caused by the massive expenditures of the former government forced the current leadership of Romania to revise the fiscal targets for 2019 and 2020, amid the economic slowdown. The planned increases in pensions and salaries will help to deepen the current account deficit which are already substantial, including in 2020".

Although S&P expects next year to begin a process of significant fiscal consolidation, the rigid budget structure and volatility of the political environment are risks to this hypothesis. The specialists at Standard & Poor's consider: "The worsening of the rating perspective reflects the risks to Romania's economic and fiscal stability if the authorities fail to stabilize and consolidate the budget strategy, including following the plans to implement new pension increases next year".

The ratings firm yesterday confirmed the "BBB- / A-3" rating for long and short term debt in foreign currency and in local currency.

Dochia: "It is likely that the next step will be the slowdown of economic growth and the rise in inflationary pressures"

Following the S&P warning, we will be borrowing at higher costs, which - given that the budget for 2019 and 2020 has a growing deficit - is worrying, economic analyst Aurelian Dochia said. He explained: "We will pay a lot more money to finance this budget deficit and the consequences are serious. Because an increase in borrowing costs for the Government can also signal an increase in borrowing costs on the private market, on all loans".

We do not know yet to what extent and how soon these consequences will materialize, but obviously the financial markets, both international and domestic, are in going through a certain reorganization after this announcement and investors will react to it, demanding higher interest rates on amounts they invest as loans or under other forms".

Later, this will spread from the financial market to the entire economy, because in general higher borrowing costs means harder access to loans for those who want to attract resources, be it private clients or companies that want to invest, Aurelian Dochia told us. In his opinion, the next step will probably be to a slowdown in economic growth and the intensification of inflationary pressures.

Regarding the withdrawals of investments from our market, they started a long time ago, said the specialist. "This year we have had withdrawals of various forms of investments. They come to our market to the extent that they can earn beyond the cost of financing that investors have to pay. This year, foreign direct investments were at a level comparable to last year, and other forms of investments such as loans or deposits in the form of deposits have decreased."

The budget deficit can not be quickly rebalanced, he says, and he concludes that we are talking about a large imbalance, and the future pressures caused by the increases in salaries and pensions - which will not be abandoned, because next year is an election year - are very hard to balance.

Regarding the estimated deficit for the current year, Mr. Dochia pointed out that the Ministry of Finance shas a reserve fund with which it "can still maneuver to a certain extent to reach a certain deficit target this year."

Codirlaşu: "If no measures for cutting the deficit are taken, then the rating might get cut"

S&P intended to cut the rating outlook since last spring, after the passing of Emergency Government Ordinance 114/2018, but gave up on that decision as certain provisions were eliminated, says Adrian Codirlaşu, CFA Romania president. He explained: "This year we have an early shock due to the pension law, which makes the budget deficit difficult to sustain. This was also said by the IMF in the first part of the year, when it stressed that the full effect of the law will lead to a deficit of 5-6%. Such results are difficult to fund and the S&P ratings firm says the same.

Then there are also twin deficits. We have the current account deficit and the budget deficit, both largest in the region, which makes Romania's economy vulnerable to external shocks. Above all, there is also the slowdown of global economic activity".

Adrian Codirlaşu however, says that S&P has only changed the outlook: "For now we have a warning, which, in the short term, may induce higher volatility, but nothing else. Only if no action is taken can the rating be cut. But the S&P evaluators assume that measures will be taken regarding the budget deficit".

The specialist told us that if a the budget runs a large deficit for a year or two, but there is a plan for it to return back to the target level, that is not a reason to cut the country rating. "We must come up with a plan to reduce the deficit", concludes Adrian Codirlaşu, saying: "The main problem is the shock of the sharp pension increase next year. This is the main point that can lead to a downgrade."

Unicredit: "The decision of S&P could put additional pressure on the exchange rate and government bond yields"

Standard & Poor's decision to cut the country's rating outlook from stable to negative, due to rising fiscal deficit and current account deficit, could put additional pressure on the exchange rate and government bond yields, as in the coming days we could see potential asset sell-offs, UniCredit analysts say. They argue that no major fiscal consolidation measures have been announced, despite market expectations (only the increase in the excise duty on cigarettes and the prohibition of collecting both salary and pension for public sector employees, without a significant impact on the budget revenues).

Moreover, the MFP has revised the deficit targets for 2019 and 2020 twice in a few days, which has caused uncertainty in the markets, the quoted sources said. They point out that, taking into account the debt financing schedule, the Ministry of Finance must borrow another 3.1 billion lei by the end of the year, with an expected increase in yields.

Cîţu: "The change in the rating outlook by S&P is due to the irresponsibility of the pro-cyclical fiscal policies promoted in the last three years"

The change in the rating outlook by S&P is due to the irresponsibility of the pro-cyclical fiscal policies promoted in the last three years and this was because the previous Government ignored all the warnings received from the ratings firm since February, says the Minister of Public Finance, Florin Cîţu, according to Agerpres.

First of all, the firm very clearly explains that the outlook change is due to the unsustainable increase of the expenditures engaged by the previous Government, more clearly, due to the irresponsibility of the pro-cyclical fiscal policy promoted in the last three years. Secondly, the firm also took into account the fiscal consolidation program presented by the current Government. Third, the firm has decided to keep Romania's sovereign rating. And fourthly, I emphasize that we are in this situation today because the previous Government has ignored all warnings received from the S&P ratings firm since February this year.

The Minister of Finance added that his efforts and that of the Ministry of Public Finance in the next period will focus on finalizing the drafting of the budget for 2020 and the 2021-2022 outlook, through which solid policies for fiscal consolidation will be implemented in the medium term.

Florin Cîţu said: "I am sure that in the coming months even the most skeptical observers will be convinced that Romania has entered a long period of responsible fiscal policy. Only naive or malicious people can claim that the country rating can be influenced after only one month of PNL governance. The ratings firm Standard & Poor's states very clearly that the main factor that could contribute to improving the outlook is to ensure fiscal consolidation, which will lead to stabilizing public finances and Romania's external position".

Dancă: "The revision of the rating perspective is not in the area of responsibility of the current Government"

The review of Romania's perspective by analysts at Standard & Poor's Global Ratings refers to the situation in public finances, which is not in the area of responsibility of the current Government, announced the head of the Chancellor of the Prime Minister, Ionel Dancă. "It has been noted that, at the end of the year, fiscal and budgetary consolidation measures were announced, which give investors confidence that Romania's perspective can be improved".

Dancă said that the analysts mentioned the measures taken by the current Government, which could improve the situation: "I would like to remind you that in the analysis of the S&P it is noted that, at the end of the year, fiscal and budgetary consolidation measures were announced, which gives investors confidence that Romania's outlook can be improved. It is a change of perspective and, at the same time, financial analysts have noticed the measures of the current Government with a view to fiscal and budgetary consolidation. We are confident that these measures will have the desired result, the regaining of the investor and financial markets confidence in the budgetary policy of the current Government".

S&P warns that it may revise Romania's rating downwards in the coming 24 months

S&P warns that it may revise Romania's ratings downwards, in the coming 24 months, if the fiscal and foreign imbalances continue to deepen and persist more than the firm currently estimates. According to it, the absence of the consolidation of the fiscal consolidation results in a higher foreign and public debt than the firm is currently forecasting.

Among other things, the lack of synchronization of the economic policy results in an increased volatility of the exchange rate, with potential negative repercussions on the balances of the public and the private sector, the quoted report says.

The specialists of the firm show that Romania's rating outlook could be improved to "stable" if it is observed that the executive is making progress in "anchoring" the fiscal consolidation, which will lead to a stabilization of the country's public finances and of its position on the foreign market.

The economic slowdown will affect government revenues, which will lead to new budgetary pressures, S&P warns. According to the rating firm's basic macroeconomic scenario, Romania's GDP growth will remain close to 3% until 2022.

Constraints on the rating include low economic prosperity, relatively poor administrative capacity, unpredictable economic environment and only medium-level monetary flexibility compared to other countries with similar ratings.

The growth of the Romanian economy would be below 4% this year, before falling in 2020-2021, following the slowdown in foreign demand, the rating firm estimates, as it does not expect a significant fiscal consolidation before the 2020 elections.

In the medium term, S&P forecasts Romania's GDP growth by almost 3% until 2022, even if there are short-term uncertainties.

In the longer term, our growth prospects remain constrained by the emigration of the skilled workforce and the demographic decline, given the lack of structural reforms aimed at solving these problems, the ratings firm warns.

In addition, high wage growth in recent years has not been accompanied by comparable increases in productivity, which has partially eroded the competitiveness of our exports, S&P explains.

The firm forecasts that the general government deficit will reach 4.3% of the GDP in 2019 and 4% of the GDP in 2020. Despite uncertainties regarding the fiscal outlook, S&P expects the NBR to keep inflationary expectations under control and maintain an adequate level of foreign currency reserves.

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