“Fitch’s affirmation of Romania’s sovereign rating balances successful fiscal consolidation and stabilization in the domestic political scene against a poor growth outlook, structural shortcomings and exposure to the risk of renewed deterioration in the eurozone,” the rating agency said in a statement.
Fitch also affirmed its long-term local currency rating on Romania at ‘BBB’ and the short-term rating at ‘F3’.
The agency said Romania has largely completed a process of sharp and relatively swift fiscal consolidation against a backdrop of poor economic activity, estimating the consolidation process will slow down in 2013-2014.
Nevertheless, “this should be sufficient for Romania to exit the EU’s excessive deficit procedure in mid-2013,” Fitch said.
Fitch expects the country’s public debt will peak at 38%-39% of GDP around 2015 and fall thereafter.
The agency said weak growth performance and outlook constrain Romania’s sovereign rating.
“The uncertain eurozone outlook, difficulties in raising low absorption rates for EU funds and slow reform of the large and inefficient state-owned enterprise sector hold back potential growth,” the statement noted.
Fitch expects GDP growth to pick up to 1.2% in 2013 and 2.4% in 2014, from a growth of 0.7% in 2012.
The agency estimates the local banking sector does not pose a material contingent liability for the sovereign ratings, given that it is mostly foreign-owned and well capitalized.
“However, the sector has been loss-making for three consecutive years to 2012: non-performing loans (NPLs) are fully provisioned, but they remain high (19.1% of total loans in February 2013) and have yet to peak,” Fitch said.
Additionally, Greek-owned retain a significant presence on the market, although it is decreasing gradually and these banks have capital and liquidity ratios above or close to the sector average, it said.
Fitch warned that Romania’s ratings could come under downward pressure if the fiscal consolidation process should stop due to a loss of fiscal discipline and a failure to proceed with the restructuring of state-owned companies and other structural reforms.
Additionally, a renewed deterioration in the eurozone debt crisis, exacerbating the current recession, would exert damage on the Romanian economy in light of its strong economic and financial linkages to the eurozone.
On the positive side, a successful reform drive and better absorption of EU funds, leading to stronger and sustainable growth in the context of a recovery in the EU economy would be good for the rating, Fitch said.