Rating agency Moody’s Investors Services has upgraded Romania’s country ceiling for foreign currency bonds and for foreign currency bank deposits, but recognizes that a lot remains to be done, pointing to the size of the losses and pervasive payments arrears of the Romanian state sector.
Moody’s upgraded the country ceiling for currency bonds from B1 to Ba3 and the ceiling for foreign currency bank deposits to B1 from B2. Also, the ratings of the Government’s foreign currency bonds have been raised to Ba3. The Government’s domestic currency bond rating has been raised to Ba3, as well. The agency’s outlook on all ratings is stable.
However, the agency feels that the inefficiency of publicly-owned companies “often undermines fiscal consolidation, complicates macroeconomic management, and hurts foreign direct investment and resource allocation.” Their performance has repeatedly impaired compliance with IMF-supported programmes, Moody’s officials believe. Until the last IMF programme completed in October (partially due to waivers on several performance targets), Romania had failed to comply with five other consecutive agreements.
Moody’s says that the upgrade primarily reflects the fact that Romania’s resilience to external shocks has strengthened over the past few years. Also, the agency notes that beyond improving its external liquidity position, the country has made progress in establishing sounder macroeconomic and political frameworks and in developing institutions that support market-oriented policies.
On the other hand, the agency speaks of progress that has occurred “haltingly and spottily,” and not yet to the degree deemed necessary to be considered a “functional market economy” by the European Union in its annual country report. Moody is “convinced, however, of Romania’s resolve to enter the EU, which could still occur by 2007.” Possible EU accession, combined with expected entry into NATO by mid-2004 provides the incentives for Romania to continue on the path of reform, the agency estimates.
In a review of Romania’s economy, the agency estimates that trade and most prices have been liberalised, transparency in the budget process is increasing and the number of off-budget items reduced. Also, tax collection, administration and debt management are all improving. The financial sector is being liberalised and capital markets developed. According to Moody’s Investors Services, “most small and medium-sized state enterprises have been divested, while the privatisation and/or restructuring of the large ones, although slow, are underway.” The fact that the banking system is increasingly under foreign ownership also mitigates concern about the country’s high level of foreign currency deposits in the banking system, Moody’s analysts said.
However, Moody’s outlines that the restructuring of state entities, combined with sustained reforms of public administration and the judiciary, is necessary to enhance productivity gains. These will in turn contribute to sustainable growth in the longer run, according to financial analysts. “The widening external current account deficit speaks about the urgency of this.” razvan.voican@zf.ro