Fitch affirms Romania’s ratings, stresses dependency to IMF

The country ceiling and short-term foreign currency issuer default rating have been affirmed at BBB and B respectively.

"Romania's IMF-backed adjustment program supports its creditworthiness, but the authorities' ability to adhere to the tough policy strategy required under the program will be crucial. The outlook for the world economy has deteriorated significantly since the ratings were downgraded last November, adding to the risks facing Romania as its economy adjusts to weaker net private sector capital inflows," said Andrew Colquhoun, Director in Fitch's Sovereigns Group.

Romania’s ratings remain supported by solid public finances, as well as strong social and business environment and governance indicators by BB standards, all of which are buttressed by the country’s EU membership, but near-term economic and financial challenges remain.

Romania secured a 26.4 billion dollars international support package in May 2009, including a two-year 17.1 billion dollars IMF stand-by arrangement designed to fill an external gap estimated by Fitch at around 12 billion dollars for 2009.

European Union has contributed 6.6 billion dollars to the package available for the authorities struggling to contain a fiscal deficit that reached 4.9% of GDP in 2008. Other international financial institutions have contributed 2.6 billion dollars to the loan. Furthermore, foreign parent banks owning about 70% of Romania’s banking system have committed to maintain overall exposures to Romania and to increase the capitalization of their subsidiaries.

Fitch projects Romania’s economy will shrink 4.5% this year. Official reserves fell to 27.1 billion euros by end-April , 7.6% below the end-November peak.

A sustained drop in reserves, sufficient to undermine confidence in Romania’s local currency would seriously affect financial stability and the real economy, (57% of bank loans were denominated in FX, mainly EUR, by end-March 2009), and would be negative for the ratings.

The IMF-backed adjustment program calls for a budget deficit of 5% in 2009. This will require a fiscal tightening of around 3% of GDP amid a steep recession, which could be a hard sell to voters ahead of presidential elections at the end of the year.

A breakdown of Romania’s IMF program would be strongly negative for the ratings. Romania is one of the countries most exposed to external financing risk among 11 economies assessed by Fitch’s “External Financing Risks in Central and Eastern Europe”.

In May, NBR’s deputy governor Eugen Dijmarescu said Romania could go back in the investment grade camp in spring next year, if rating agencies upgraded country ratings in fall.