Friday, February 27, 2009

S&P doubts Romania's ability to pursue fiscal tightening

* S&P doubts Romania's ability to pursue fiscal tightening
* Sees Romania entering recession this year
* Sees budget gap at 6.2 pct/GDP vs 2 pct government target
* Sees euro zone entry in 2015-2020
* Maintains "junk" status, keeps negative outlook
By Marius Zaharia

BUCHAREST, Feb 27 (Reuters) - Standard & Poor's, the first agency to downgrade Romania to a "junk" rating, warned on Friday that Bucharest's stringent fiscal plans may be threatened by social pressures and unrealistic expectations of economic growth. Romania's centre-left coalition approved an austerity 2009 budget last week. It set an ambitious fiscal deficit goal of 2 percent of GDP, compared with over 5 percent last year, in an effort praised by the central bank and the International Monetary Fund.

But S&P analyst Marko Mrsnik said the agency was still not convinced that Bucharest can fulfil its plans, four months after it downgraded Romania.

"The problem is that firstly, (the budget) is based on underlying macroeconomic assumptions which appear overly optimistic and secondly is going to prove difficult to be implemented," Mrsnik told Reuters in an interview.

"The strength of the government coalition may be tested as the planned fiscal restraint may come under pressure due to popular demands for increased spending in order to cushion the effects of the ongoing economic downturn."

S&P downgraded Romania's foreign currency credit by one notch in October to "BB+", with a negative outlook, due to a lack of fiscal response to its vast external deficit which has left the economy vulnerable during the global cash squeeze.

Mrsnik maintained this rating and outlook. A presidential election later this year posed another risk for fiscal tightening, he said, adding that he was sceptical about the budget's projection of 2.5 percent economic growth.

He now forecasts the economy will shrink 0.8 percent this year, compared with a previous estimate of 0.8 percent growth, largely due to a deterioration in the external environment.
Mrsnik sees the budget deficit widening to 6.2 percent of GDP in 2009 and inflation at 5.3 percent, above an officially targeted 2.5-4.5 percent.

A potential deal with the IMF would signal the government is willing to pursue right policies to stabilise the economy, but the fiscal restraints which will be part of the deal may weaken the ruling coalition by boosting social unrest, Mrsnik said.

"Every such agreement comes also with some strings attached and the governing coalition might be tested as the government may face substantial pressure for additional budgetary outlays, especially in the area of social transfers," he added.

He did not rule out the possibility that potential fiscal constraints of an IMF deal could create a rupture in the coalition of President Traian Basescu's Democrat-Liberals and their leftist Social-Democrat partners.

Romania and Latvia are the only European Union members rated below investment grade. Romania is expected to follow the Baltic state's example and seek an aid package from international institutions, including the IMF.

Mrsnik also said that Romania was more likely to join the euro zone in the second half of the next decade, compared with its target of 2014. (Editing by David Stamp)

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