S&P upgrades Romania's rating to investment grade

By bne IntelliNews May 19, 2014

Rating agency S&P said it has upgraded Romania’s credit rating by one notch to BBB- [long-term] and A-3 [short term], thus joining the other two large global agencies Moody’s and Fitch that also evaluate the country’s risk level at the lowest grade above the non-investment or speculative area. The outlook is stable.

The upgrade comes more than five years after the agency downgraded Romania in October 2008 amid the financial crisis and ahead of the expected economic recession. In the meantime, the country’s macroeconomic fundamentals improved dramatically. Fitch has already returned the rating to its pre-crisis level in April 2011 and Moody’s has not even downgraded the country during the recession.

EFFECTS: The upgrade is broadly unlikely to impact the sentiment of the investors as it was already priced in the country’s fundamentals invoked by the rating agency. Nonetheless, as mentioned by BCR Bank's head analyst Radu Craciun for Agerpres, the yields of state debt instruments can still slightly decrease since fundamentals suggests such a potential and technically some investors requiring investment-grade from both Moody’s and S&P might strengthen the demand.

UPS AND DOWNS: S&P’s rating action was driven by two main rationales: i. the rapid improvement in the external position and ii. the progress, expected to continue, toward consolidating the fiscal accounts and bolstering financial sector stability. Romania's governance framework is mentioned as a ratings weakness – even if the rating agency admits that recent domestic political turmoil left unaffected the economic performance.

FORECAST: The rating agency sketched a forecast scenario that is slightly more optimistic than the one agreed by the government with the IMF or the one issued recently by the EC. Namely, the country’s GDP would increase by 2.8% this year [vs. 2.2% projected by the government, 2.5% forecasted by the EC and 2.6% by EBRD] and by an average of 3% by 2017. The stronger growth rates would result in nearly doubling the C/A gap from 1.1% of GDP in 2013 to 2.1% of GDP in 2017 – which is however within the safe external deficits area as mentioned by the agency. Low external deficits besides the financial system’s deleveraging will expectedly contribute to the improvement of Romania’s external debt position, the agency comments. The increased absorption rate of EU structural funds should also ensure a capital account surplus of about 1.7% annually, further supporting the external deleveraging.

Romania - Selected indicators 2013e 2014f 2015f 2016f 2017f
Nominal GDP (USD bn) 189 205 214 222 234
GDP per capita (USD) 9,435 10,257 10,752 11,192 11,816
Real GDP growth (%) 3.5 2.8 3.0 3.2 3.2
Real GDP per capita growth (%) 3.9 3.1 3.3 3.5 3.5
Change in general government debt/GDP (%) 3.0 2.2 2.3 2.2 2.2
General government balance/GDP (%) -2.3 -2.2 -1.9 -1.8 -1.8
General government debt/GDP (%) 38.4 38.4 38.5 38.5 38.5
Net general government debt/GDP (%) 32.8 33.3 33.5 33.6 33.6
General government interest expenditure/revenues (%) 5.4 5.4 5.5 5.5 5.5
Other dc claims on resident non-govt sector/GDP (%) 35.7 34.0 33.6 33.6 33.5
CPI growth (%) 4.0 2.9 3.0 3.0 3.0
Gross external financing needs/CARs +use. res (%) 89.9 87.2 86.3 85.7 85.0
Current account balance/GDP (%) -1.1 -1.0 -1.3 -1.8 -2.1
Current account balance/CARs (%) -2.2 -2.0 -2.5 -3.4 -3.8
Narrow net external debt/CARs (%) 55.9 49.6 44.9 41.6 38.1
Net external liabilities/CARs (%) 129.4 120.2 114.2 110.5 105.5
Source: S&P          

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts.

The data and ratios above result from S&P’s own calculations, drawing on national as well as international sources, reflecting S&P’s independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

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