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Thursday, November 18, 2004
A very promising report came from Ficth Ratings yesterday. In the repport, Romania has been upgraded to Investment Grade by upgrading the foreign currency and local currency ratings. Romania's outlook has been promoted to Stable.
Please find more details below, in the original Fitch Ratings Press Release.
source: Fitch Ratings-London-17 November 2004
Fitch Ratings, the international rating agency, has today upgraded Romania's Long-term foreign currency and local currency sovereign ratings to 'BBB-' (BBB minus) and 'BBB' respectively, from 'BB' and 'BB+'. At the same time, the Short-term rating and Country Ceiling are upgraded to 'F3' from 'B' and to 'BBB-' (BBB minus) from 'BB,' respectively. Following the upgrade, the Outlook is now Stable.
The upgrade is supported by Romania's prudent fiscal policy, advances on key structural reforms and good prospects on European Union (EU) accession. Most key public debt sustainability indicators compare favourably with rating peers' and should continue to improve over the next two to three years. Policy discipline seems to be more firmly anchored than was the case two years ago, and the government's structural reform record is now arguably ahead of or at least equal to many rating peers'. Policy will remain guided by a new IMF programme scheduled to run until July 2006, and the exacting requirements of EU accession, which Fitch expects to occur in January 2007. In the agency's opinion, this is unlikely to be disrupted by the parliamentary and presidential elections scheduled for late November 2004.
"EU accession remains a big driver of policy discipline and hence improving creditworthiness," according to Nick Eisinger, lead analyst for Romania at Fitch's Sovereigns team. Important breakthroughs in energy reform and privatisations have earned Romania the 'functioning market economy' status from the EU and kept the January 2007 accession date on track. There will be more focus on the implementation of the chapters following the inclusion of 'safeguard clauses' to the accession process, and in some areas considerable efforts will be needed to conclude negotiations. However, Fitch does not envisage any major problems to emerge. In fact, the inclusion of the 'safeguard clauses' should help maintain reform momentum.
Strong GDP growth (7.5%) in 2004 is bolstering budget revenues, and has allowed the government to make two downward adjustments to its budget deficit target, now set at 1.6% GDP. Growth will slow in 2005, but still remains respectable and broadly supportive of ongoing fiscal discipline. A series of tax cuts are outlined for 2005, while there are also a number of potential strains on government spending, especially on public wages. However, the tax base should widen while efforts are being made to reduce subsidies, so the official 1.5% GDP deficit target is unlikely to be overshot by very much. Narrow budget deficits, together with robust GDP growth, a strong exchange rate and solid privatisation revenues, are supporting favourable public debt dynamics. General government debt (including guarantees) is forecast to end 2004 equivalent to around 24% GDP, and should continue to fall gradually during 2005 and 2006.
Strong investment-led growth has been driving up the current account deficit, forecast at 6% of GDP in 2004. Fitch expects further widening of the current account deficit in 2005-2006 to around 6.5% GDP per year. While this imbalance will need monitoring, Fitch is not overly concerned at this stage. Romania continues to generate large balance of payments surpluses, building foreign reserves and keeping a lid on net external debt, forecast at some 19% GDP at end-2004. Foreign direct investment-coverage of the current account deficit currently stands at around 60% and should increase, while much of the external imbalance is being driven by investment, as opposed to consumption. As capital account liberalisation is pursued in 2005 an increase in short term debt inflows is probable. Fitch expects short term external debt to rise to 19% of total debt at end-2005 (17% in 2004) and to 21% of total at end-2006. However, overall gross external debt should remain at its end-2004 forecast of around 38% of GDP for the next couple of years.
Developments in the banking system will also need monitoring given the rapid pace of credit expansion seen in the past two years. Non-performing loans are low at present, but could rise further down the credit cycle. The banking system has increased its external borrowing in order to finance FX-linked domestic loan growth, which has grown rapidly this year. Fitch highlights that the counterparts of much of this loan growth do not necessarily have hard currency revenue streams, which leaves the banking system exposed to an exchange rate shock
Posted by Mihai Botea : 11/18/2004 02:14:00 pm
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