Fri, Nov 14 2008, 13:58 GMT
By Natasha Brereton
OF DOW JONES NEWSWIRES
SAO PAULO -(Dow Jones)- Romania does not need help from the International Monetary Fund and the recent junking of its sovereign rating was unwarranted and misguided, Romanian central bank deputy governor Eugen Dijmarescu says.
The recent downgrades of Romanian sovereign debt by Fitch and Standard & Poor's - to a notch below Bulgaria, Latvia and Kazakhstan - could spur caution among private foreign investors and put the squeeze on the country's external financing needs.
In an interview following meetings of the Bank for International Settlements in Sao Paulo, Dijmarescu said the National Bank of Romania agreed with rating agencies on the need for restraint in fiscal policy, but said he was hopeful the policy course would turn more sober after Nov. 30 elections.
"I take their decision in terms of sending a strong signal of concern for instance for the fiscal policy and wage policy," Dijmarescu told Dow Jones Newswires.
"We totally agree with them and we at the central bank have signaled this for more than three quarters repeatedly. But I don't think it is sufficient (with) just one factor to say that everything is black," he said.
He also said some of the agencies' concerns were unfounded and said it was "frustrating" they had not discussed them with the central bank before changing their view. Rating agencies should pay greater attention to conditions in individual countries, and be more thorough in their research, particularly when they're making a large change in their assessments, he added.
"I think they were probably concerned about the future looking at the situation of the region as a whole. Maybe they should have to be more attentive in depicting differences from one market to another," he said.
The major agencies have been slashing sovereign ratings around eastern Europe. Late Thursday, Standard & Poor's cut its outlook on BB-rated Turkey to negative, citing the risk of a sudden halt in the financing of Turkey's indebted private sector that could affect public finances.
Romania is the only European Union member to have a junk rating, even though its current account deficit is smaller than regional neighbors such as Bulgaria and the Baltic states and it is not hobbled by a currency peg.
Standard & Poor's downgrade followed swiftly on the heels of a 50% hike in Romanian teachers' salaries, the latest and most outlandish of a series of costly moves.
Dijmarescu said the downgrade may have a silver lining if politicians now take the issue more seriously once the general election is over.
"Maybe we will have a discussion with the new government soon after they take position, because I am sure that they are concerned," Dijmarescu said.
Romania's main political parties all support euro-zone entry, implying that their future budget policies will be much tighter in the future, he said.
Still, the NBR has rejected reports it said the next government will have to raise taxes, including the flat-rate income tax.
While Romania's budget deficits are unusual for the region, they do not pose a dramatic risk as the country's public debt is less than 12% of gross domestic product, is not rising, and is backed up by large international reserves, Dijmarescu said.
"We are not perfect, but it is important that at least we know this, and we are taking some measures to correct the imbalances," he said.
He pointed to the Leu's quick rebound from its post-downgrade fall as a sign that serious investors in Romania remain unfazed.
Romania should not be put in the class of at-risk countries such as Hungary and Ukraine, both of which are now receiving support from the IMF, Dijmarescu said.
Romania will "certainly not" have to approach the IMF for aid, he stressed when asked.
This week, Latvia said that it may have to resort to IMF help. In Turkey, the government is eager to avoid an IMF loan - which usually requires public spending to be cut - but business lobbies are increasingly calling for a new agreement to facilitate the rollover of corporate debt.
Dijmarescu strenuously rebutted the idea that Romania might see a rapid outflow of the capital from euro-zone banks that has fueled its credit-driven economic growth.
The health of those banks is important, since they could refrain from renewing commitments in Romania or charge more for the privilege if they are under financial strain, he said, acknowledging that credit growth - which had been running above 50% a year - was slowing amid a new and more cautious attitude.
Many Romanian loans are in euros, creating the risk of a mismatch of the kind that caused Hungary's markets to clog up last month.
But Romania's central bank has hiked the reserve requirement for lenders in foreign-currency to 40%, more than double the local-currency reserve requirement, and that provides a "strong buffer" for the national financial system, Dijmarescu said.
"I wouldn't say we have a liquidity crisis or that we are in danger of facing one in the short term, or even in one year or two years," he said. "On the contrary, we have been criticized (for the high reserve requirements), but now even the banks feel more comfortable under the present circumstances."
The NBR has also asked banks to subject clients asking for loans in currencies other than the Leu to conduct extra stress tests.
Investors are not likely to rush to the doors in a country on course to post the fastest GDP growth rate in the 27-member E.U. this year.
Dijmarescu noted that many companies were reinvesting their profits in Romania. Investors are not likely to rush to the doors in a country on course to post the fastest GDP growth rate in the 27-member E.U. this year.
"Maybe they will invest less in future but still clearly this development shows that those investors really were interested in the market and they knew they could take advantage of developments in the market," he said.
It is "possible," but "certainly not an easy task" for Romania to join the currency union by 2014, he said.
The tougher fiscal policy required to qualify should also bring Romanian inflation, which accelerated to 7.4% in October, down to 4.5% by the end of next year, putting it just inside the NBR's target range.
That, plus slower economic growth after this year's surge, should also help to reduce the volatility of the Leu's exchange rate, which he said had declined to a "more normal" level, following strong gains last year. "I don't feel we are now in a long term depreciation stage," he said.
-By Natasha Brereton, Dow Jones Newswires; +44 20 7842 9254; firstname.lastname@example.org