Ratings firm Standards & Poor’s affirmed last Friday its BB+/B long-and short-term foreign and local currency sovereign credit ratings on Romania, as the macroeconomic figures are starting to improve, although low prosperity and the exposure to foreign parent banks may threat the economy.
Romania lost its investment grade from S&P in 2008 and the BB+ rating is used for junk bonds.
S&P said Romania’s fiscal deficit is declining and the current account deficit has narrowed, while the government continues to consolidate its public finances in line with IMF requirements.
The economy is expected to grow by 1.2 percent of GDP and should increase by an annual average rate of 3.5 percent in the medium term, supported by the increased use of EU funds and a recovery in foreign direct investment.
S&P expects some fiscal slippages this year due to the November elections, but the recovery of public sector wages in June and December may stimulate consumption.
The domestic currency RON has lost 30 percent in nominal terms against the euro compared with its peak in mid-2007 and this increases the debt burden of households in the domestic currency, according to S&P, which adds the RON has stabilized.
The ratings firm forecasts the general government debt will peak at about 30 percent of GDP this year, although arrears in state-owned enterprises (SOEs) remain high at 4 percent of GDP. General government arrears decreased by 0.2 percent of GDP.
The S&P analysts expect the current account deficit to remain around 4 percent of GDP in 2012. This figure was 11.6 percent in 2008.
The banking sector could face a shortage of credit from foreign parent banks which could be pressured to reduce cross border exposure to their subsidiaries. Lines of credit from parent banks to their subsidiaries are 25 percent of the total balance sheets liabilities (excluding capital) for Romania’s aggregate banking sector. This figure increases to 35 percent for Greek subsidiary banks.
Foreign institutions own 83 percent of the total banking sector assets. Austrian banks hold 39 percent of the total market share, while subsidiaries of Greek banks account for 13 percent. S&P says the Romanian subsidiaries of Greek banks enjoy operational autonomy that can limit the spill-over effect from a Greek banking crisis.
A deviation from the reform plan and a slowdown of the fiscal consolidation, adding to a widening of external deficits could force S&P to downgrade Romania.
Romania has a BBB- rating from Fitch on long term foreign currency credit and BBB for the local one. Short-term sovereign credit is F3.
Moody’s is the only ratings firm that maintains Romania in the group of countries recommended for investments. At present, Romania has a Baa3 rating with stable outlook.