Standard & Poor’s Ratings Services says that the prospect of early elections in Romania will not immediately affect the sovereign credit rating on the Republic of Romania (foreign currency BB+/Positive/B; local currency BBB-/Positive/A-3).

The ratings were originally placed on positive outlook in February 2005, based on the commitment of the new centrist government to step up Romania’s economic and institutional reforms.

Following the constitutional court’s decision to reject judicial reform legislation crucial for EU accession, Prime Minister Calin Popescu Tariceanu announced on July 7 that his government would resign to pave the way for early elections.

“As the opposition Social Democratic Party is still in disarray and regrouping following their surprise electoral defeat in late 2004, and given President Traian Basescu’s high popularity ratings, the ruling PNL-PD coalition is likely to be returned to power with an increased majority, which could accelerate the reform process going forward,” says Standard & Poor’s credit analyst Moritz Kraemer.

Nevertheless, if early elections were to be held, probably in September or October 2005, this would almost certainly put the reform legislation and implementation on hold for several months, thereby raising the probability that the EU will apply the safeguard clause and postpone accession by one year to 2008. As time is running out, Standard & Poor’s now expects there is a more than 50% probability that the accession will be delayed.

An upgrade to investment grade will depend on whether the emerging administration will be able to push the reform process further, especially in the areas of microeconomic reform and transparency. 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,” says Kraemer. “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.”