Moody’s says Bulgaria, Croatia and Romania have chance to be the main winners from EU’s post-crisis funding

Moody’s says Bulgaria, Croatia and Romania have chance to be the main winners from EU’s post-crisis funding
By Iulian Ernst in Bucharest April 21, 2021

Croatia, Bulgaria, and Romania would see the most significant GDP gains — of 1.0, 1.0, and 0.8 percentage points (pp) per year, respectively — over 2021-27 among the eastern EU members, assuming full absorption of traditional funding and Recovery and Resilience Facility (RRF) grants, rating agency Moody's concluded in a report on the Central and Eastern European countries.

EU funding will boost economic growth, but institutional challenges will delay or even curb gains for some countries, the rating agency warned.

Final investment levels will eventually depend on how much these countries can absorb from the funding pool. Countries with a weaker past track record, such as Romania, would need "an upgrade of institutional capacities that is not easily achievable and takes time to materialise," the report reads.

Besides stronger growth, fiscal metrics are also likely to improve as a result in these countries. Higher growth would see debt to-GDP ratios fall by a cumulative 4.3 pp over 2021-27 in Romania, according to calculations by Moody's analysts.

The soft loans Romania gains access to under RRF and SURE (7.4% of GDP altogether) mark a significant improvement in the country's debt-affordability metrics, similarly to most of the CEE countries that face higher funding costs than the EU.

That said, "implementation challenges may slow or even reduce gains,” said Heiko Peters, VP – senior analyst at Moody's Investors Service.

Implementation challenges will be most profound in countries that stand to gain the most from EU funds, such as Croatia, Bulgaria, and Romania, according to the rating agency's report.

Notably, according to Moody’s assessment, the quality of legislative and executive institutions in Romania ranks as the worst (ba) among the region's eight countries (with the Czech Republic leading thanks to its aa rating).

The government's effectiveness in Romania is evaluated by Moody's at negative (-0.3) — the sole negative performance in the group where Slovenia's government leads with a strong positive (+1.1) performance.

Romania's public procurement is also assessed with a negative grade by Moody's (-0.5), with the Czech Republic and Slovakia facing the same problem while none of the region's countries thrives in this regard.

Past irregularities (fraudulent or not) are historically the highest yet not immense in Romania (2.9% of funds disbursed in 2015-2019), yet nothing like Slovakia's 21% ratio and not far from the other peers.

The past absorption track also varies among the region's countries. Only Poland and Slovenia had an absorption rate of 100% in the 2007-13 budget period. Absorption rates were lowest for Croatia (84.2%) and Romania  (90.5%), who, together with Bulgaria (97.3% absorption), stand to gain most from the EU funding if the funding is fully absorbed.