Romania recently tapped into the Eurobond market, successfully raising 3.2 billion euros through the issuance of two new bonds. This move involved securing 1.8 billion euros with bonds maturing on May 30, 2032, carrying a coupon rate of 5.25% (ISIN: XS2829209720), and an additional 1.4 billion euros from bonds maturing on May 30, 2037, offering a 5.625% coupon (ISIN: XS2829810923). Despite not being part of the Eurozone, Romania’s bond issuance in euro is a notable event, especially as the nation maintains its national currency, the leu, closely pegged to the euro.
Romania’s Credit Rating and Economic Outlook
Romanian bonds denominated in euro are currently positioned within the medium-to-lower tier of creditworthiness. Credit rating agencies like S&P and Fitch have assigned a BBB- rating, while Moody’s rates them at Baa3.
These ratings are just a notch above “junk” status, meaning a further downgrade would classify Romania’s public debt as non-investment grade. While Romania’s debt-to-GDP ratio remains relatively modest at 48.8% in 2023, its fiscal deficit is a concern, standing at 5.6% of GDP last year. However, there’s optimism for economic growth, with GDP expected to accelerate from 2.1% in 2023 to a projected 3.3%.
A critical aspect for investors considering Romanian Euro bonds is the level of the nation’s foreign currency reserves, which are crucial for debt repayment. Romania’s reserves stand at 62.5 billion euros, while its total external liabilities are significantly higher at 178 billion euros. Of this external debt, 48 billion euros are due within the next twelve months. Adding to the financial landscape, Romania consistently runs a negative trade and current account balance, which tends to deplete its reserves over time.
Yields and Risks Associated with Romanian Bonds
Analyzing the recent Romanian bond offerings in euro, the 2032 maturity bond is currently trading around 98 cents, translating to a gross yield exceeding 5.55%. Similarly, the 2037 maturity bond is also priced at approximately 98 cents, yielding about 5.85%. These yields are attractive, surpassing those offered by comparable Eurozone government bonds like Italian BTPs of similar durations. However, this higher yield reflects a medium-high risk profile associated with investing in Romanian government bonds.
For investors, Romanian Euro bonds could present an opportunity for portfolio diversification, offering geographical exposure beyond the Eurozone core. However, this diversification comes with the trade-off of accepting a lower average portfolio credit quality and acknowledging the inherent risks associated with emerging markets and sovereign debt outside of the Euro area’s strongest economies.
