International rating agency Fitch has confirmed the BBB-/stable rating for Romania’s long-term foreign currency Issuer Default Rating (IDR), it said in a press release on Sep 13. Fitch thus maintains the country at the lowest level above the speculative investment area, in line with S&P and one notch above the rating given by Moody’s.

Fitch assumes that the government in Bucharest will meet broadly the targets set in its EU Convergence Programme update of April 2013. The agency also anticipates a gradual recovery in the Eurozone.

An upgrade/downgrade of the sovereign is linked to the pace of structural reforms, including the sale or restructuring of key state owned enterprises. An upward risk to result in rating upgrade would stem from higher than expected reduction of the external debt ratios. Conversely, a fiscal loosening or tougher external turbulence could prompt a downgrade.

The local currency IDR is also kept at BBB/stable, the short-term rating at F3 and the country ceiling at BBB+.

Fitch highlights encouraging dimensions of the sovereign rating analysis: i. the public finance consolidation, ii. the reduction of external imbalances, iii. the existence of safety buffers, iv. the improving GDP growth and v. the stable banking sector.

Nonetheless, Fitch notes that in each of the analysed dimensions there are constraints that prevent a further sovereign upgrade. The public debt, expected to stabilise around 40% of GDP in 2013-2015 following the fiscal consolidation, is only in line with the BBB- category median. The CA surplus, of 1.1% of GDP in H1 this year, is partly cyclical and will be followed by deficits in 2014-2015 [albeit at lower levels than the pre-crisis 11%-of-GDP norm]. Even if the rating agency upgraded the GDP growth projection for this year to 2% to accelerate slightly in the coming years – it appears insufficient to reduce meaningfully the gap with average EU incomes.

The banking system is stable, but it is also constrained by the non-performing loan (NPL) ratio of 20.9% in July 2013 and yet to peak. The deleveraging and banks not cleaning up their balance sheets impair the transmission mechanism and the resumption of lending.