S&P raises Romania to investment grade

By bne IntelliNews May 19, 2014

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Standard & Poor’s on May 16 raised Romania to investment grade for the first time since 2008, reflecting the government’s success in bringing down external debt and reining in public spending. While Romania is already visibly experiencing reform fatigue, growth rates will likely continue to outstrip most of Emerging Europe and maintain the country's position as one of the region's most favoured investment destinations. 

The international rating agency said it raised Romania to 'BBB-', the lowest investment grade, putting it on the same level as key emerging markets Russia and Brazil. Romania’s success in shedding its junk rating after more than five years follows a strict austerity programme, with S&P saying that the upgrade “underlines our view that progress toward consolidating the fiscal accounts and bolstering financial sector stability will continue”.

Romania’s endorsement by S&P and increased status among investors are new developments. In Soviet times even the Russians considered themselves lucky that they weren't living in Romania. Suffering one of the lowest standards of living, the overthrow of the communist regime in 1989 didn't bring much succor, as it was largely seen as a counter-revolution. Riven by corruption and lacking any sort of meaningful reforms, Romania has spent most of the last decade bumping along at the bottom. That was until recently. A big International Monetary Fund (IMF) programme and some steel in the government's political will has seen the country’s economy grow quickly and its stock market soar. Romania is now being pegged as the successor to Turkey as the new darling of international investors.

Ironically, the 2008 crisis made all the difference. First Poland and then Turkey had their turn as the standout performers in Emerging Europe. However, more recently the gloss has started to come off the Polish story and Turkey continues to struggle from the twin ills of political instability and a large current account deficit.

Romania became an EU member state in 2007, along with Bulgaria, and embraced the long wish-list of the reforms that comes with membership.

A July 2013 agreement with the IMF and EU on a €4bn precautionary loan has helped the country's performance, along with more money from the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank. Under the agreement, Bucharest is committed to restructuring major state-owned companies in the transport and energy sectors to prepare for privatisation, as well as reforming the healthcare system. “We won’t use the money, it’s just a buffer we can count on in extraordinary circumstances, like a financial crisis in Europe or worldwide,” Prime Minister Victor Ponta told journalists immediately after striking the deal.

The Romanian authorities are also hoping that the nascent economic recovery in Europe will gather steam and lift the Romania economy along with the rest of the region. Despite the lacklustre performance of most economies in the region, Romania has been putting in some good results. “We believe Romania will maintain steady GDP growth, averaging 3 per cent over 2014-2017. While this is slower than before the 2009 financial crisis, it is above any regional peer,” says S&P. “This underlines the return of relatively healthy fundamentals, even if Romania’s national income per capita in 2014 is still roughly equal to its 2008 high.” S&P also forecasts that the main driver for growth will gradually shift from external to domestic demand.

While Mihai Tantaru, economist with ING Bank Romania, notes that Romania has been visibly experiencing reform fatigue, ie. repeatedly postponing state-owned enterprise privatisation and reform, he says: "While certainly not a short-term prospect, a GDP growth surprise could eventually lead to further positive rating action for Romania since it would aid the ongoing external deleveraging."

The macroeconomic numbers are clear, but the key to the country's recovery is its renewed fight against corruption. Several leading politicians have been arrested and convicted in court in the last year as the government makes its first serious attack on the problem.

Finally, the country's recovery is being helped by the excellent performance of its largest companies. OMV Petrom, a subsidiary of Austria's oil and gas company, is particularly noteworthy, because it is benefitting from both high oil prices and the continuing liberalisation of the domestic gas market.

And investors' interest has been piqued. One example is consumer goods giant Procter & Gamble, which in March was reported to have purchased a new 25-hectare plot in Urlati, where its shampoo plant is located, and is mulling plans to build a warehouse and a new factory. The multinational is being tempted in by the strong domestic consumption growth - up 11% in the first quarter of this year - that is fueling the recovery.

Likewise, on January 1 Romania officially granted foreign citizens the right to directly purchase farmland, which was snapped up by would-be farmers. The government estimates that by end of the first quarter over a third of Romania's fertile land is now in the hands of foreigners.

Romania appears to be getting the lion's share of Chinese investment going into the region, and the country received 51.3%, or $12bn, of the total foreign direct investment (FDI) in the seven countries of Southeast Europe since 2005, according to a recent United Nations Conference on Trade and Development (UNCTAD) report.

Investors are also looking ahead to the promise of a large-scale privatisation programme as well as more IPOs of state-controlled companies. Electrica is due to be listed in mid-2014, and the government hopes the company will raise as much as $1bn - beating Romgaz’ record breaking IPO in 2013. Companies are becoming more market orientated and leading firms such as Fondul Proprietatea, the part-owner of many public sector companies, are pushing the state to bring more of the economy into the private sector. This is accompanied by growing awareness amongst corporates of the need for good corporate governance and other investment-friendly initiatives.


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