InterCapital: Credit rating downgrades for Romania underscore concerns over fiscal stability
<p>Divo Pulitika, fund manager at InterCapital Asset Management, noted in a recent analysis that the downgrades of Romania’s credit rating outlook from Stable to Negative by <a href="https://www.romania-insider.com/fitch-cuts-romania-outlook-negative-december-2024">Fitch</a> on December 24, 2024, and <a href="https://www.romania-insider.com/sp-revises-romania-rating-negative-january-2025">S&amp;P</a> on January 24, 2025, underscore growing concerns over the country’s fiscal and economic stability. </p>
<p>InterCapital Asset Management is the largest independent investment fund in Croatia and has been active on the Bucharest stock exchange for 15 years. The fund launched a <a href="https://www.romania-insider.com/intercapital-launches-new-etf-bucharest-stock-exchange">BET-linked ETF</a> on BVB in spring of last year.</p>
<p>S&amp;P explained that its action was prompted by rising risks to Romania's public finances over the next several years, after average deficits of 7.6% of GDP since 2020 that resulted in 15 percentage points (pp) rise in the debt-to-GDP ratio to 52.4% at the end of 2024.</p>
<p>“While these downgrades do not yet equate to a reduction in the actual rating, they serve as a clear warning and a precursor to potential downgrades into sub-investment grade (junk) territory, should fiscal and macroeconomic trends fail to align with expectations,” Pulitika said.</p>
<p>He also added that the implications of such a rating would extend across Romania’s bond and equity markets, government finances, and broader investor sentiment.</p>
<p>“The bond market is likely to bear the brunt of any potential downgrade, as it reflects both fundamental and technical adjustments. Institutional investors such as pension funds and insurance companies, which are often restricted from holding junk-rated bonds, would be compelled to offload Romanian bonds if two or more agencies reduce the rating to sub-investment grade,” the fund manager explained. </p>
<p>“Romanian 10-year euro-denominated bonds currently trade at a yield of 5.96%, representing a 351-basis point (bps) spread over German Bunds, which equals to 3.51% over Germany. This spread, already elevated compared to regional peers like Hungary (184 bps; 1.84%) or Greece (89 bps; 0.89%), indicates that markets have begun to price in higher risk. Historically, spreads for Romanian bonds peaked at nearly 600 bps in 2022 during the energy crisis and the war in Ukraine. If the spread returns to such levels, yields could reach 8.4%, leading to an estimated 16% decline in bond prices,” Pulitika argued.</p>
<p>The drop could increase to as much as 26% should the 10% yield barrier be breached.</p>
<p>As a result of further credit downgrades, Romania’s borrowing costs would increase. The first major test will come on February 21, 2025, when Fitch has scheduled an update on Romania’s rating. </p>
<p>The stock market, while less directly impacted, would also reel as negative sentiment toward Romania could lead to capital outflows and lower valuations across the Bucharest Stock Exchange. Romanian banks like Banca Transilvania and BRD, key components of the BET index, may face notable headwinds. High-earning sectors like energy and banking could also face higher taxes.</p>
<p>“The government has already projected a 7% budget deficit for 2025, which aligns with market expectations, but sustained fiscal discipline will be crucial to prevent further downgrades. Higher debt servicing costs may prompt the government to accelerate tax collection efforts or introduce new taxes,” Divo Pulitika says.</p>
<p>Nonetheless, as the analysis shows, despite the immediate risks, a credit downgrade does not equate to economic collapse.</p>
<p>“The government’s ability to maintain discipline amid political pressures, especially in the run-up to presidential elections, remains a critical question. The coming months will be decisive for Romania’s financial stability,” the same source concludes.</p>
<p><em><a href="mailto:radu@romania-insider.com">radu@romania-insider.com</a></em></p>
<p><em>(Photo source: company photo)</em></p>