Standard&Poor's politically downgrades Romania

(story to be published in tomorrow’s issue, March 24)

Romania’s chances of having access this year to private foreign financing are minimal, according to statements by officials of international rating agencies. While the IMF on Wednesday announced it postponed the issue of a decision on the technical extension of the accord with Romania until after the budget is passed in Parliament, international rating agencies rule out the possibility of improving ratings. Without a “green light” from the IMF, and with elections drawing near, therefore within a climate of political incertitude, private investors will halt all flows of capital aimed at Romania, under the form of direct or portfolio investments, or under the form of loans, analysts consider. Indeed, as to foreign investments, the tendency is clear and has been confirmed by the latest statistics issued by the National Office of the Trade Registry, which indicates a level of foreign currency-denominated share capital invested in February worth only 9.6 million dollars, while in January it had reached about 17 million dollars. IMF continues to be reluctant as to the solicitation of the Romanian Government for a 60-day technical extension of the standby agreement that expires at the end of the month, because IMF experts are doubtful about the Government’s being able to keep the budgetary deficit at 3 percent of GDP. On the other hand, Bucharest government officials consider they will be able to request, during the reunion of IMF’s Management Board of April 16, an extension of the accord, provided that the budget should be by that time passed by the Parliament. International rating agencies analysts are however sceptical. Representatives of Standard&Poor’s (S&P) and of Fitch IBCA state that ratings for Romania will not be improved this year. “During year 2000, we will maintain Romania’s long-term rating at B- and the short-term one at C,” stated Helena Hessel, a director for Central and Eastern European of S&P. David Riley, Hessel’s counterpart of Fitch IBCA shares her opinion: “We will for the time being maintain ratings B and B- on the short and long term granted to Romania last year”. According to Standard&Poor’s official, improving the rating of Romania largely depends upon legislative elections to be held in autumn. This year is an electoral one and the possibility of a change of power makes political forces within the ruling Coalition influence all macroeconomic actions of the current Executive, Helena Hessel also said. Moreover, in the opinion of S&P, to introduce the economic reform measures within the current programme of the World Bank and the IMF, particularly the close-down of loss-making state-owned enterprises and privatisation on a large scale, which have experienced a period of stagnation during the last two years, rough and unpopular measures will be needed, which have as an effect a rise in the unemployment rate. “Given the economic drop and parliamentary elections, investors and private creditors wonder whether the Government is expected to take these measures for the implementation of the programme concluded with the IMF, considering its well-known effects over the population. Romanians’ living standard is expected to keep falling. All these considerations take Romania’s risks even higher,” Hessel thinks. Even though at a governmental level the general impression is that S&P is being unfair towards Romania, the Premier’s advisor Lucian Croitoru reckons that the agency can be influenced in the positive sense only through firm actions. “We can positively influence them only when we prove clear actions in the Romanian economy,” Croitoru says. He admits that S&P estimates will have a direct impact on the behaviour of foreign investors in Romania, and on any attempt to enter capital markets. “Their promise to keep a B-minus rating is bad news for Romania. In this case, we need the breath of fresh air called the IMF,” Croitoru explains. Konrad Reuss, an analyst at S&P, says political uncertainties could make the IMF extend the loan accord. “The same political problem comes with the IMF, even if Premier Mugur Isarescu has the capacity to take the agreed programme to completion.” According to Reuss, the Democrat Party is oscillating between presence in government and quitting into opposition. “You will see in the future plenty of chicanes from the PD, endangering economic reforms,” Reuss added. He gave the examples of PD ministers’ requests for more budget allocations during the recent budget debates in Parliament. Speaking about the implications of Romanian politics, Reuss added that an election victory for the PDSR would extend the shortage of foreign financing into the next year. “The negative key of the Romanian issue is the possible return to power of the party led by Ion Iliescu. This will completely confuse the incipient economic reforms and will completely distance Romania from international financial institutions and private creditors,” Konrad Reuss said. Helena Hessel believes, however, that Romania’s isolation is the result of hesitation in economic reforms in all ten years of transition. “It is a shame that in ten years of democracy, Romania has been unable to pass a bankruptcy law and privatise enterprises that create major losses to the economy,” she says. Foreign investors’ behaviour is directly influenced by these legislative gaps. “After taking a hit in countries like Russia, Ukraine and Bulgaria, foreign investors have become sceptical enough to dodge Romania.” In other words, Romania will pay not only for its economic policy mistakes, but also for the mistakes made in the last ten years by all of East and Southeast Europe.