RSS
Moody's Affirms Romania At Baa3, With Stable Outlook
Moody's Investors Service affirmed Friday the Baa3 local and foreign currency ratings of the Romanian government, with a stable outlook, citing the moderated public debt burden, though it expects Romanian economy to contract in 2009. Moody's also affirmed the country's local and foreign currency bond ceilings at Aa3 and A1, respectively, the foreign currency deposit ceiling at Baa3, short-term foreign currency bond ceiling at P-1, and short-term foreign currency deposit ceiling at P-3. All the ratings and ceilings have a stable outlook."Romania's status as an investment-grade country is supported by the government's moderate debt burden," Kenneth Orchard, Vice President-Senior Analyst in Moody's Sovereign Risk Group, said in a press release. "Its gradually deepening institutional strength derived in large part from EU accession two years ago is also important," Orchard added.
The ratings agency noted, though, the increased external vulnerabilities in recent years after the rapid growth of domestic credit, fuelled by generous capital inflows. "In addition, due to rather lax fiscal policy through the boom years, the government was in a weak position going into the global economic crisis," Orchard said. He added the surge in spending associated with the national elections in November 2008 has exacerbated the problem.
Moody's expects the Romanian economy to contract in 2009 as exports are slowed by the deep recession in Western and Central Europe, and as foreign capital inflows subside.
The combination will likely force a sharp reduction in the current account deficit, which will lead to rising unemployment and weak government revenues, Moody's also said."Moody's understands that the government has had to borrow at relatively high interest rates for short maturities in the domestic market to finance a growing budget deficit in recent months," Orchard said. "Added to balance of payments pressures, the situation is hardly sustainable."
The rating affirmation is premised on the attainment of an IMFEU financing programme, coupled with a successful fiscal adjustment. Moody's expects Romania to obtain extraordinary financial assistance from the EU and IMF to ease the adjustment as its economic environment deteriorates, with a total support package of more than EUR20 billion over two years."There are strong incentives for both the Romanian government and the EU to cooperate to stabilise Romania's economy," Orchard said. However, if EU is becoming less inclined to support Romania, a downgrade of Romania's ratings to below investment grade would be likely, he added.
Moody's forecasts that government debt ratios will increase substantially over the next few years, but the debt service should remain at affordable levels. Moody's central scenario is for Romania's debt-to-GDP ratio to reach almost 30% by the end of 2010, up from 16% in 2008, but still well below the current EU average of 50%.The last rating action on Romania was implemented on 6 October 2006, when Moody's upgraded the local and foreign currency debt obligations of the government to Baa3 from Ba1 and upgraded the foreign currency bond ceiling to A1 from A2.The other two major rating agencies, Standard & Poor's and Fitch, downgraded Romania in the fall of 2008 to below investment grade, citing the large current account deficit and the high external debt, during the ongoing financial crisis.