Positive economic outlook for Romania

Moodys rating agency affirms Romania's sovereign rating, at a Baa3 level.

Leyla Cheamil, 06.11.2023, 14:00

Moodys rating agency has affirmed Romanias sovereign rating, at a Baa3 level. Concurrently, the short-term issuer ratings have been affirmed at Prime-3. The outlook on the ratings remains stable. According to Moody’s, the affirmation of the Baa3 ratings reflects Romania’s robust medium-term growth prospects, supported by strong EU funds and foreign direct investment. The stable outlook balances the positive economic trend against the government’s continued difficulties to durably reduce Romania’s elevated fiscal and current account deficits.

Romanian Finance Minister, Marcel Bolos, has pointed out that Moody’s decision is one more confirmation that Romania’s Government has taken all necessary and correct measures to combat the social-economic effects of the recent crises, and to ensure a sustainable public finance system. The announcement contributes to a favorable economic climate, to reducing financing costs and to promoting investment in Romania, the minister also said, pointing out that reforms and the fiscal-budgetary consolidation measures continue to be the priorities of the Finance Ministry.

Although Moody’s forecasts growth to slow down to 2% this year, following two years of solid growth in 2021 and 2022, as inflation dampens consumption and the euro area economic downturn weighs on external demand, Romania’s medium-term growth prospects remain strong. Moody’s expects growth to rebound to 3.2% in 2024 and 3.5% in 2025, in line with the rating agency’s estimate of the economy’s potential growth rate of 3% to 3.5%.

Romania’s strong growth prospects are supported by high levels of EU-funded investment and foreign direct investment. The country has been allocated a total of around 11% of 2021 GDP in grants and loans under the EU’s Recovery and Resilience Facility to be spent until 2026. According to the rating agency, although implementation is somewhat behind the original schedule, the Romanian authorities have continued to make progress with meeting the reform and investment milestones necessary to unlock the funds from the EU. Funds under the EU’s regular 2021-2027 budget cycle will also ramp up in coming years, bringing total EU funding to an average of around 4% of GDP per year. Moreover, Moody’s expects foreign direct investment in sectors such as industry and IT will remain strong in coming years at around 3% of GDP. Moody’s also expects the trend of rapid labor productivity growth to continue, as Romania continues to catch up with more advanced European economies. Such positive trends will largely dominate the negative impact of fiscal consolidation and labor shortages in coming years, according to Moody’s. (EE)