‘BBB-‘ is the lowest investment grade rating. Fitch downgraded Romania to ‘junk’ in the fall of 2008.
Additionally, Fitch announced it has upgraded Romania’s country ceiling to ‘BBB+’ from ‘BBB-‘ and the short-term foreign currency issuer default rating to ‘F3’ from ‘B’.
“The upgrade reflects Romania’s progress in recovering from the effects of the financial crisis, evident in a return of gross domestic product growth, a strong export performance, narrowing in the current account deficit and reduction in its budget deficit,” said Ed Parker, Head of EMEA Sovereigns at Fitch. “Overall, there has been a material easing in Romania’s downside risks, commensurate with a return to an investment grade rating,” he added.
Economic recovery started in early 2011, with GDP up 1.6% year-on-year, after one of the longest recessions in the EU, Fitch said. It noted the recovery is driven by strong export growth, while the contraction in domestic demand has also contributed to the necessary correction in the current account deficit to 4.2% of GDP in 2010 from 11.6% in 2008.
“Critically, the budget deficit is now on a downward trajectory after painful fiscal measures equivalent to around 5 percentage points of GDP since 2008, and supported by the cyclical recovery,” the statement noted.
Fitch said the government is on track to meet its 2011 deficit target of 4.9% of GDP, down from 6.4% of GDP a year earlier.
General government debt was 30.8% of GDP at end-2010, which remains below the ‘BBB’-range median of 35%. In addition, the government has successfully accessed international capital markets and started to lengthen the maturity of its domestic debt, the ratings agency said.
The follow-up precautionary IMF/EU program agreed in March 2011 and the new fiscal responsibility law should also help to anchor policy discipline, it added.
“Nevertheless, Fitch believes that some further policy measures will be required to reduce the budget deficit to meet the target of 3% of GDP in 2012 and sees a risk of moderate fiscal slippage, not least with parliamentary elections scheduled for November 2012,” the statement noted.
Fitch said another main downside risk relates to the financial sector, where non-performing loans are still increasing and reached 13% at end-April 2011, although concerns are partly mitigated by the relatively high capital adequacy ratio of 14.9% and just adequate provisioning levels.
“In addition, 16% of the banking system (as a percentage of assets) is owned by Greek parent banks, though Fitch understands that these banks do not have any significant exposure to Greek sovereign assets,” it noted.
Fitch estimated Romanian inflation, which hit a 33-month high of 8.4% in May, will ease in the second half of the year due to favorable base effects. However, it will remain “significantly above” the central bank’s year-end target of 3%, Fitch said, adding that inflation is unlikely to return to target by end-2012.
Moody’s kept Romania in the investment-friendly zone over the past three years, while Standard & Poor’s still rates it in the “junk” category.