Romania’s 2024-2028 government bonds recorded their biggest ever daily rise Monday, after the country’s credit rating was spared a downgrade to ‘junk.’
S&P Global on Friday kept Bucharest’s rating at BBB-, the lowest level of investment grade, though it also maintained its ‘negative outlook,’ effectively a downgrade warning.
The government’s 2024-2028 bonds saw their biggest daily price gains, with rises of between 1.2 and 1.7 euro cents, while longer-term bonds jumped as much as 2.2 euro cents, Reuters reported.
“We affirmed the rating, given Romania’s comparatively low net general government and external debt. We believe Romania will have the ability to absorb the level of deterioration we now expect for 2020,” S&P said.
ING Bank said “The next six months will be decisive for Romania’s political and fiscal outlook which remains fragile, but near-term optimism is underpinned by the European Central Bank repo line and hopes on a European recovery fund.”
Concerns about the country’s investment grade status were present even before the coronavirus dented the economy, which is now expected to contract 5.5% this year.
A pencilled 40% hike in state pensions has fuelled rating uncertainty too. Although pensions are now expected to be reduced to a 10% increase. However, the budget deficit, already being closely watched by the EU, looks set to soar to 8% of GDP.
Moody’s and Fitch also have ‘negative outlooks’ on their equivalent Romania ratings. Moody’s has a scheduled rating review on October 23 and Fitch on October 30, followed by S&P again on December 4.
ING Bank called S&P’s rating affirmation “a much-needed reprieve and means that downgrade fears have been put off to 4Q20.”
“For now, near-term risks of a downgrade have disappeared but uncertainty about the pension hike and populistic initiatives ahead of the elections mean that downgrade fears will run high into the rating reviews in 4Q20 and beyond.”
Our take is that despite the negative fiscal fallout from Covid-19, rating agencies appear willing to wait, in the case of S&P reflected by the reference to “risks to Romania’s fiscal and external balances over the next 18 months”.
“The next six months will be crucial for rating agencies and markets.”