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Moody's: Improved macro-economic balance supports Romania's credit profile

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Romania's Baa3 government bond rating is supported by the government's moderate debt levels as well as the anticipated improvements in productivity and incomes, says the annual credit report published by Moody's Investors Service on Thursday.

These improvements are expected to accrue as a result of Romania's continued integration into the European Union via trade and investment, it adds.

Policy vigilance and financial support from international institutions are additional sources of support for the rating. The rating also incorporates credit challenges, including a relatively high external debt burden and inefficiencies in some state-owned enterprises that pose contingent liabilities for the government, while also constraining overall economic competitiveness, said Moody's.

In April 2014, Moody's changed the outlook on Romania's Baa3 rating to stable from negative, as the recovery in the euro area and Romania's own improved macro-economic outlook had reduced negative pressures on Romania's sovereign credit profile. Over the last year, Romania's growth has accelerated while its fiscal and current account deficits have declined, and inflation has decelerated.

The stable outlook on Romania's Baa3 rating reflects Moody's expectation that these macroeconomic improvements are likely to be sustained. According to the report, a combination of an improved regional growth outlook, reduced domestic macro-economic imbalances and policy efforts to kick-start domestic investment and consumption will improve Romania's average growth over the next five years to levels above those in the last five years, the report underscores.

However, the report adds that GDP growth is likely to remain below pre-crisis averages of between 6% and 7%, as external leverage and domestic credit are unlikely to rise to the extent they did in the years prior to 2008. Still, if the current recovery proceeds in conjunction with low fiscal and current account deficits and improved international competitiveness, Moody's believes that growth could be more resilient to shocks than it was prior to the global financial and euro area debt crises.

A reversal of fiscal consolidation, a decline in competitiveness or deterioration in balance of payments metrics could put downward pressure on Romania's rating. Upward pressure on the rating may emerge from a combination of a material improvement in the medium-term growth outlook or in external debt and debt-service ratios, or a shift in the government debt profile such that refinancing risks were reduced, the rating agency says.

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