Monday, October 22, 2012

Moody’s: Romania’s not so bad

FT's BeyondBrics

A diversified economy with good potential for income growth and increased competitiveness, low government debt ratios and an improving fiscal situation. Not a bad report for one of the EU’s poorest countries, wracked in recent years by first economic and political crises.

These are the conclusions of the annual credit report on Romania published by Moody’s. says the country’s Baa3 government bond rating is supported by the fundamentals – which is reassuring even though Moody’s is keeping Romania on “negative” ratings watch.
The report is weighed down by the usual caveats about Romania – its bloatedpublic sector, exposure to the eurozone crisis, low levels of current GDP growth and a propensity for political wobbles.

Moody’s evaluates a country’s sovereign rating on its position in four areas: “economic strength, institutional strength, government financial strength and susceptibility to event risk – as well as the interplay between them”. In each, the agency currently rates Romania as “moderate”.

A press release issued publicising the report said that it took into account:

The country’s diversified economic base and potential for future increases in competitiveness and incomes, relatively low government debt ratios, access to multilateral financial support, and continued improvement in the fiscal balance despite political volatility this year. The rating agency notes the credit challenges posed by Romania’s balance-of-payments vulnerabilities manifested in its current account deficit and its relatively high level of external debt, with significant annual repayment obligations. Other credit challenges incorporated in the rating are the reliance of many of Romania’s banks on foreign (largely euro area) parent bank funding, as well as the country’s poor record in state enterprise performance and privatisation.

It’s been a grim few years for Romania: it enjoyed rapid growth in the last decade, but came a cropper in the wake of the global economic crisis, which exposed the economy’s weaknesses, and led to a deep recession in 2009, when the economy contracted by 7.1 per cent.

Pro-cyclical fiscal loosening in the boom years has been followed by equally pro-cyclical austerity, which led to street protests earlier this year and the toppling of the government in April. The new, socialist-led administration has been heaped with opprobrium by the EU and other international organisations for moves seen as attacks on the constitution and independent national bodies.

The Moody’s report thus serves as a useful reminder that Romania isn’t all bad. Economic growth is picking up, though forecast economic growth of 2.5 per cent next year is still pretty low by emerging market standards. Efforts to consolidate the budget have made progress, and while the deficit widened to 1.17 per cent in August, that’s a respectable figure by comparison with many European countries.

The eurozone crisis looms large over Romania. The Moody’s report suggests that if and when the crisis reaches resolution, Romania may be left in much the same position as it was in 2009: with plenty of potential, but some serious structural issue to address.

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