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Standard & Poor’s Ratings Services has revised its outlook on the Republic of Romania to positive from stable. At the same time, the ‘BB+’ long-term and ‘B’ short-term foreign currency, and the ‘BBB-‘ long-term and ‘A-3’ short-term local currency sovereign credit ratings on Romania have been affirmed.

 

“The outlook change is based on the commitment of the new centrist government to step up Romania’s economic and institutional reforms, which will in turn solidify the prospect of Romania’s timely accession to the EU in 2007,” says Standard & Poor’s credit analyst Moritz Kraemer. “At the same time, budgetary developments are likely to improve relative to previous estimates, despite a radical tax reform introduced by the new government on the day after its inauguration.”

 

Macroeconomic stability has greatly improved in recent years. On the back of buoyant economic growth, the general government deficit (excluding the parastatal sector) fell to about 1% of GDP in 2004 and is likely to record a similar level in 2005. Moreover, sustained fiscal and parastatal consolidation will keep government debt below 30% of GDP until the end of the current decade. Finally, inflation fell into single-digits in late-2004, and formal inflation targeting – to be adopted in 2005 – should further anchor inflation expectations.

 

The ratings remain constrained, however, by institutional weaknesses, external imbalances, low levels of economic prosperity and a large, albeit declining, loss-making parastatal sector.

 

“We expect the new government to remain committed to pushing forward with institutional reform and to working toward a more investor-friendly business environment,” adds Kraemer. “Progress in these areas will increase the chances of EU entry on schedule in 2007.”

 

“An upgrade to investment grade will depend on whether the new administration will be able to follow up on its policy announcements with tangible results in the areas of microeconomic reform and transparency,” says Kraemer. “Maintaining a cautious policy mix, including prudent fiscal policies, will also be necessary for an upgrade in the next 12 months.”

 

A delay to EU membership into 2008 would not in itself put any downward pressure on the ratings on Romania. Nevertheless, a sustained and significant weakening of the current account balance and the concomitant effects on external debt and liquidity could lead to a decline in creditworthiness, especially if net foreign direct investment were to fall short of expectations.