Standard & Poor’s Ratings Services has raised its long-term foreign currency ratings on the Republic of Romania to ‘BB’ from ‘BB-‘, and its long-term local currency ratings to ‘BB+’ from ‘BB’. At the same time, Standard & Poor’s affirmed its ‘B’ foreign and local currency short-term ratings on Romania. The outlook remains positive.
“The upgrade reflects the strong competitiveness of the Romanian economy,” says Standard & Poor’s credit analyst Helena Hessel. “Ongoing restructuring and modernisation are underpinning continued robust growth driven by exports and investment.”
Despite low growth in the EU and a drought earlier this year, Romania is expected to post real GDP growth of at least 4.5% in 2003. The industrial base is being modernised, the banking system has recently strengthened, and the restructuring of the inefficient energy sector is proceeding, albeit at a slow pace. This should support robust GDP growth in the medium term, and facilitate integration within the EU, with accession expected in 2007.
“The economy has also benefited from strong fiscal and monetary policies,” Hessel adds. “In particular, the central bank’s recent resolute policy on interest rates insulated Romania from balance-of-payments pressures.”
Despite a strong export performance, the current account deficit widened significantly in the first half of the 2003, reflecting a surge in imports stimulated by an earlier cut in interest rates, as well as high wage increases. The swift tightening of monetary policy after several months of loosening helped to reverse the build-up of external pressures at an early stage. Official foreign exchange reserves continued to grow in the first eight months of the 2003, to US$6.6bn in August up from US$6bn at year-end 2002. As a result, Romania’s external liquidity and solvency ratios remain strong.
Strong vested interests, patronage, and corruption still pose some risk and, at times, undermine Romania’s image among foreign investors. These issues also cloud the country’s relations with multilateral organisations. Structural reforms have progressed, although more slowly than advocated by the IMF, reflecting weak investor interest and political hindrances. Nevertheless, some important privatisations have moved forward, alongside other restructuring and adjustment measures in line with EU accession requirements.
Achieving further disinflation remains a challenge. Inflation has remained on a downward trend this year, but is estimated at a still high 14.5% for year-end 2003. The pace of disinflation was slowed by necessary public sector price increases and a drought. Further progress will be made easier if income policies are applied more successfully and evenly across loss-making government-owned companies.
“In Standard & Poor’s opinion, the prospects for sustained restructuring and modernisation of the economy during the next several years are good,” says Hessel. “The ratings could be raised further within the next couple of years if financial discipline and structural reforms continue.”