S&P affirms ratings on Romania at ‘BBB-/A-3’. The outlook is stable

Standard & Poor’s has affirmed the long and short-terms foreign and local currency credit ratings on Romania at ‘BBB/A-3’, maintaining the outlook stable.

The credit rating agency explains through a release that the ratings are supported by “Romania’s low and declining external debt stock, its narrowing general government deficits, and moderate stock of general government debt amid relatively firm growth prospects”.

On the other hand, these ratings are constrained by the governance framework, the relatively low GDP per capita, and the high private sector debt denominated currency, which, albeit declining, can constrain monetary policy.

“While we do not expect the upcoming presidential elections to weigh on economic performance, we continue to view Romania's governance framework as a ratings constraint. We believe emerging geopolitical risks will be contained as Romania's economic links with Ukraine and Russia remain fairly limited (for instance, combined exports and imports are less than 5% of total exports and imports) and we do not foresee any direct security implications”, states the said release.

Due to the technical recession Romania experienced in the first half of this year, S&P anticipates a deceleration of the GDP to 2.2 percent. However, they expect the GDP growth to average 2.7 percent within 2014 and 2017 with a progressive strengthening of domestic demand, despite a declining population and growth inhibitors such as poor infrastructure. Other factors possibly affecting their forecast are a low-rate of EU-funds absorption or lower-than-anticipated inflows of foreign direct investment capital.

As regards the 2.2 percent GDP deficit target for 2014, the agency expects the Romanian government to meet it, yet they note that most of this year’s budgetary spending which looks likely to take place in the last quarter can potentially lead to poor-quality allocation of public resources.

Although upside and downside risks to the rating are balanced, an improved rating could be supported provided the planned program of budgetary consolidation, public finance reform, and public enterprise restructuring is implemented successfully without changing current trends regarding external imbalances and financial-sector stability.

At the same time, the ratings could be lowered if Romania's external imbalances re-emerge, if stability in its financial sector weakens, or budget deficits widen significantly, explains S&P.