S&P said the country’s fiscal deficit is declining, the current account gap has narrowed and the economy is recovering.
However, the ratings on Romania are constrained by low prosperity and “the economy’s vulnerability to external shocks” owing to still-high external debt and dominant ownership of the banking sector by Austrian and Greek parent banks, it added.
S&P forecasts Romanian real gross domestic product will strengthen to an annual average of 3.5% in the medium term, from a growth of 1.2% envisaged for 2012.
The economic expansion will be fueled by rising investment, facilitated by the increased use of EU funds and a recovery in foreign direct investment, which will support household spending and exports, the agency said.
However, private consumption is likely to remain constrained in the short term by the need for continued household deleveraging, as foreign-currency household borrowing (mainly euros) accounts for about two-thirds of the loan book, the statement noted.
S&P expects Romania will continue to consolidate its public finances largely in line with its targets, although structural reforms and fiscal restraint might face public opposition, particularly ahead of the general elections in the fall.
“We expect some fiscal slippage, partly owing to our lower projection for GDP growth, and risks associated with the November 2012 parliamentary election, though the rise in public sector wages may stimulate consumption-related taxes more than currently expected,” the international agency said.
The agency forecasts Romanian net general government debt will peak at about 30% of GDP in 2012 before falling “very gradually.”
S&P said foreign parent banks could reduce cross-border exposure to their Romanian subsidiaries, thereby reducing credit availability.
Lines of credit from parent banks to their subsidiaries are 25% of total balance sheet liabilities (excluding capital) for Romania’s aggregate banking sector, and 35% for the Greek subsidiary banks, the statement noted.
“However, we note that the regulatory and prudential frameworks have been strengthened so as to mitigate the risk of a funding or capital withdrawal by parent banks,” S&P said.