Moody�s affirms Romania�s investment-grade status

Moody’s is the only financial rating agency that decides to keep Romania’s status within the investment-grade parameters, after S&P and Fitch sent Romania to junk.

The agency is likely to downgrade the government’s ratings to below investment-grade if there are signs that the EU is becoming less inclined to support Romania, said Kenneth Orchard, Vice President-Senior Analyst in Moody's Sovereign Risk Group.

"There are strong incentives for both the Romanian government and the EU to cooperate to stabilize Romania's economy. Should there be signs that the EU is becoming less inclined to support Romania, however, a downgrade of the government's ratings to below investment grade would be likely," said Orchard.

Moody’s has affirmed Romania’s ratings and ceilings, keeping outlook stable, decision supported by the government’s moderate debt burden by its gradually deepening institutional strength derived from the EU accession.

Moody's expects Romania to obtain extraordinary financial assistance from the EU and IMF to ease the adjustment as its economic environment deteriorates, with a total support package of more than EUR20 billion over two years.

Approximately one-half of the support will come from the IMF and the remainder will be provided by the EU and related institutions. The program will likely be structured whereby the IMF funds are provided for balance of payments support, and the EU funds will be used for budgetary financing, thereby easing immediate liquidity concerns.

Thus, Moody's has today affirmed the Baa3 local and foreign currency ratings of the Romanian government.

The country's local and foreign currency bond ceilings are affirmed at Aa3 and A1, respectively. Moody's also affirmed Romania's foreign currency deposit ceiling at Baa3, short-term foreign currency bond ceiling at P-1, and short-term foreign currency deposit ceiling at P-3. The outlook on all the ratings and ceilings remains stable.

"Romania's status as an investment-grade country is supported by the government's moderate debt burden," said Kenneth Orchard. "Its gradually deepening institutional strength derived in large part from EU accession two years ago is also important."

Moody's notes that rapid growth of domestic credit, fuelled by generous capital inflows, have increased the country's external vulnerabilities in recent years. "In addition, due to rather lax fiscal policy through the boom years, the government was in a weak position going into the global economic crisis," Orchard explained.

"The problem was exacerbated by a surge in spending associated with the national elections in November 2008."

Moody's expects the Romanian economy to contract in 2009 as exports are slowed by the deep recession in Western and Central Europe, and as foreign capital inflows subside. The rating agency believes that the combination will likely force a sharp reduction in the current account deficit, which will lead to rising unemployment and weak government revenues.

"Moody's understands that the government has had to borrow at relatively high interest rates for short maturities in the domestic market to finance a growing budget deficit in recent months," says Mr. Orchard. "Added to balance of payments pressures, the situation is hardly sustainable."

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