Tuesday, September 06, 2005

The Report Card

via www.reporter.gr

Romania: Upgraded by S&P on Declining Debt Burden Outlook Stable
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17:10 - 06 September 2005 - Standard & Poor's Ratings Services said it raised its long- and short-term foreign currency sovereign credit ratings on the Republic of Romania to 'BBB-' and 'A-3', from 'BB+' and 'B', respectively, on improving government indebtedness indicators. At the same time, the long-term local currency rating on Romania was raised to 'BBB' from 'BBB-', and the 'A-3' short-term local currency rating was affirmed. The outlook is stable.

Romania is the twelfth sovereign currently rated by Standard & Poor's that has made the transition to investment grade from speculative grade. The full analysis on the Republic of Romania will be published later today on RatingsDirect, Standard & Poor's Web-based credit analysis system. The report will also be posted on Standard & Poor's public website, www.standardandpoors.com (select Credit Ratings, then select Sovereigns from the left-hand menu, then find under Credit Reports).
"The upgrade stems from the improvement in general government fiscal indicators that has occurred on the back of buoyant domestic demand," said Standard & Poor's credit analyst Moritz Kraemer. "GDP looks set to grow at almost 6% in 2005, with domestic demand expanding almost twice as rapidly."

As a result, the general government deficit will reach 1.3% of GDP, despite a comprehensive tax cut associated with the introduction of the 16% flat tax in 2005, and additional spending pressures related to the floods affecting part of the country this summer. General government debt will drop to less than 20% of GDP in 2005, well below the 'BBB' median. Sustained fiscal consolidation and parastatal budget control will lead to a stabilizing general government debt ratio. By the end of the current decade, this ratio will inch up to a moderate 22% of GDP, as GDP growth will ease toward a more sustainable 5.0% and EU-accession related spending pressures will make themselves felt.

The ratings on Romania remain constrained by institutional weaknesses, significant external imbalances, low levels of economic prosperity, and a large, albeit declining, loss-making parastatal sector.

"Romania's external imbalances are offset by its EU membership prospects, which would make the growth- and investment-enhancing economic modernization process irreversible," said Mr. Kraemer. "Furthermore, we expect that the government will take the necessary action to reduce the large current account deficit, which could reach 9% of GDP in 2005."

In this context, a prudent approach to public finances and the careful management of capital inflows and the ongoing domestic credit boom will be vital. Failure over the medium-term to effectively mitigate the vulnerabilities caused by the persistent external imbalances could bring the ratings under renewed downward pressure. A delay to EU membership to 2008 is now more likely than entry in 2007, but would not in itself put any downward pressure on the ratings on Romania.

Further improvements of the rating would hinge on policy predictability, sustainable continued real convergence with higher-rated peers, and tangible success in reducing Romania's governance problems.

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