The affirmation reflects Romania’s steady progress in adjusting the economy toward external demand, consolidating the fiscal accounts, and bolstering financial sector stability, the ratings agency said in a statement.
It said the positive outlook indicates the possibility to upgrade ratings on Romania in the second half of 2014. “We could raise the ratings if the planned program of budgetary consolidation, public finance reform, and public enterprise restructuring is implemented in line with our expectations, while keeping external imbalances and financial sector stability in check,” S&P said.
On the other hand, the agency might revise the outlook to stable if–against its expectations and in the run-up to the 2014 elections–the budget deficits widen significantly or the government pulls back from the restructuring of the public enterprises. “The ratings could also come under downward pressure if Romania’s external imbalances re-emerge or if stability in its financial sector weakens.”
S&P believes Romania’s GDP growth will gradually strengthen over 2013-2016, helped by the continued rebalancing of its economy toward external demand. “Over 2013-2016, we project that Romania will post an average annual current account deficit of about 1.6% of GDP. The shift to external demand over the past five years has occurred primarily due to higher exports, leaving the expected 2013 trade deficit at between 3% and 4% of GDP, versus 14% of GDP in 2007. This adjustment has made Romania a more open economy, with exports that we project to exceed 45% of GDP in 2016, versus 30% of GDP in 2009. The export growth reflects Romania’s improved cost competitiveness against that of most of its trading partners. In this context, we believe Romania’s 2011 labor market reform has improved the economy’s flexibility and facilitated the swing toward export-led growth.”
However, domestic demand remains subdued, notes S&P, as it is constrained by public-sector spending cuts, modest wage dynamics, and weak investment activity, resulting from banking sector deleveraging and negative credit growth to the private sector, among other things. The agency expects the government to improve its capacity to absorb EU funds in the coming years, which could lead to an increase in investment activity.
S&P views Romania’s financial agreements with the International Monetary Fund and the European Commission as positive developments, “both to bolster the government’s resolve as it presses forward with its pro-growth structural reforms and to serve as a backstop if Romanian banks’ external rollover rate remains below 100% (as it has since 2010) or if the country’s broader external financing conditions deteriorate.”
In September, Romania signed a new two-year precautionary stand-by agreement with the IMF, which combines with a financial package from the EU, amounting to a total EUR4 billion.
Romania should meet its budget deficit target of 2.6% of the gross domestic product in 2013, despite “some revenue underperformance so far and an increase in the discretionary government wage bill,” S&P said, adding the deficit is expected top decline further next year.
“In light of the fiscal constraints and commitment to meet the budgetary target, the government has in the revised 2013 budget trimmed domestic capital expenditure, which in our view could detract from Romania’s long-term economic growth prospects,” S&P warns. It notes, on the other hand, that the government has increased its budgetary flexibility in case of a faster-than-planned increase in the absorption of EU funds.
“We believe there is a risk that the Romanian government could deviate from its budgetary and structural reform plans in the run-up to European and presidential elections in 2014. We recognize, however, that Romania benefits from buffers that should help to maintain investor confidence and keep borrowing costs down. These cushions include a flexible exchange rate regime, which helps the central bank pursue an independent monetary policy, foreign exchange reserves that currently exceed short-term external debt by remaining maturity, and potential financial support from official creditors,” the agency concluded.