This Wednesday, Fitch Ratings, the international rating agency, upgraded Romania’s long-term foreign currency sovereign rating by two notches to “BBB-“. This means Romania is included among investment grade countries.
The local currency sovereign rating was raised one notch to “BBB”, with the outlook now stable. This makes Fitch the first rating agency to include Romania among “investment grade” countries.
The strength of the upgrading comes as a surprise to many analysts, since expectations pointed to next year for Romania’s inclusion in this category. These expectations took into account the future “trials” Romania will be put through, including the shock that might be felt following liberalisation of the capital account in April 2005, inflationary pressures and the rise in the trade deficit likely to be generated by overheating of the economy.
“EU accession remains a big driver of policy discipline and hence improving creditworthiness,” argues Nick Eisinger, chief-analyst for Romania at Fitch.
International markets reacted to these modifications, and the yield on bonds issued by the Finance Ministry shrank by a further 0.6-0.9 percentage points. Analysts envisage subsequent yield drops, given that markets are yet to integrate this modification, and predict the emergence of new investor categories interested in investing in Romanian bonds.
S&P stuck to its one notch below investment grade rating for Romania of “BB +”, with the most recent modification made last September. Moody’s agency granted Romania a Ba3 rating for its long-term foreign currency debt, three notches below the “investment grade” level.
Strong investment-led growth has been driving up the current account deficit, forecast at 6% of GDP in 2004. According to Fitch, the current account deficit is likely to further widen to a level of 6.5% of GDP for 2005 and 2006. And while this imbalance will require monitoring, Fitch is not overly concerned at this stage.
Romania continues to generate large balance of payments surpluses, is building foreign reserves and keeping a lid on net external debt. As a result, for the end of this year, the weight of external sovereign debt (including guarantees) is put at some 19% of GDP.
According to Fitch analysts, the strong economic growth of 7.5% seen in 2004, has allowed the government to make two downward adjustments to its budget deficit target, now set at 1.6%. Growth will slow in 2005, but still remains respectable and broadly supportive of ongoing fiscal discipline.
liviu.chiru@zf.ro