Fitch Ratings-London-25 March 2009: Fitch Ratings says today that Romania's proposed IMF facility for a EUR12.95bn, two-year Stand-By Arrangement, backed by a further EUR7bn in money from the EU and multilateral institutions, should shore up the country's external finances and reduce the risk of a damaging financial crisis, provided the authorities keep to their policy commitments. Romania is rated Long-term foreign currency Issuer Default (IDR) 'BB+', local currency IDR 'BBB- (BBB minus)', both with Negative Outlooks, and Short-term foreign currency IDR 'B'. The Country Ceiling is 'BBB'.
"Fitch views Romania's proposed IMF programme as supportive for its ratings as it should help to meet the country's sizeable external financing needs and provide a breathing space to rebalance the economy," said Andrew Colquhoun, Director in Fitch's Sovereigns group. "Nevertheless Romania faces a challenging economic and financial outlook and it will be vital for the authorities to keep to the attached policy conditions."
Previously rapid growth in domestic and external borrowing has left Romania heavily exposed to ongoing global de-leveraging. Credit to the domestic private sector grew at annual rates of around 60% in 2006 and 2007, funded partly by money from foreign parents which own around 90% of Romania's banking system. Credit growth slowed to 34% in 2008 as the credit crunch raised the cost of funds for foreign parents and diminished investor risk appetite. Net external debt rose to a projected 29% of GDP by end-2008 ('BB' range median: 3%), from just 7% at end-2005. The current account deficit was 12.2% of GDP in 2008, as strong credit growth fuelled domestic demand and drew in imports.
Fitch projects Romania's gross external financing requirement, not including short-term debt, at USD27bn for 2009, or USD59bn including short-term debt, against reserves of USD36.4bn by end-January 2009. Pressure on the external finances amid diminished international investor risk appetite has driven a 21% depreciation of the RON since end-August 2008. Currency volatility poses risks for the banking system, as around 50% of system loans are denominated in foreign currency.
The impact of financial market turbulence is being reinforced by a slowdown in Romania's key trade and investment partners in the euro zone. Expectations for euro zone 2009 GDP growth have been revised down sharply since Fitch downgraded Romania to 'BB+' in November 2008. Romania's growth slowed to 2.9% yoy in Q408, from 9.2% in Q308; Fitch expects Romania's economy will contract by 4.5% in 2009. Slowing growth will directly affect the fiscal finances and make it difficult to narrow the fiscal deficit from 4.8% of GDP in 2008. However, the ratings continue to benefit from low general government debt of just 20% of GDP by end-2008, while a lack of sovereign eurobond maturities in 2009 reduces refinancing risk this year.
Even if an IMF programme is agreed, implementation and execution risk will be significant. Romania's politicians may find it difficult to implement tough stability-oriented policies as the economy contracts for the first time in a decade, while presidential elections later in the year could increase pressure for populist policies.
Fitch downgraded Romania's sovereign ratings by two notches on 10 November 2008 and maintained Negative Outlooks on its Long-term IDRs. For more information, please refer to 'Fitch Downgrades Bulgaria, Hungary, Kazakhstan and Romania' on www.fitchratings.com
Contacts: Andrew Colquhoun, London, Tel: +44 (0) 20 7417 4316; Ed Parker, +44 (0) 20 7417 6340.
Media Relations: Peter Fitzpatrick, London, Tel: + 44 (0)20 7417 4364, Email: email@example.com.