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September 25, 2021

S&P affirms Romania’s ratings at ‘BB+, with stable outlook

Net general government debt will peak at about 30 pc of GDP in 2012, the rating agency considers.

Standard & Poor’s Ratings Services affirmed its ‘BB+/B’ long and short-term foreign and local currency sovereign credit ratings on Romania with a stable perspective, according to a press release, Mediafax reports. The transfer and convertibility (T&C) assessment is ‘BBB+’. “The ratings on Romania are constrained by low prosperity and the economy’s vulnerability to external shocks owing to still-high, albeit declining, external debt and dominant ownership of the banking sector by Austrian and Greek parent banks. The ratings are supported by the country’s improving fundamentals; the fiscal deficit is declining, the current account deficit has narrowed, and the economy has started to rebalance, with the support of an IMF“, S&P reports.Also, foreign institutions own 83 percent of total banking sector assets. Austrian banks dominate, holding 39 percent of total market share, while Greek banks’ subsidiaries account for 13 percent of banking sector assets. The rating institution believes operational autonomy might limit spill-over effects if confidence in the Greek banking sector continues to weaken”.In S&P point of view, there is a risk that foreign parent bank difficulties could cause the parents to significantly reduce cross-border exposure to their subsidiaries, thereby reducing credit availability. Lines of credit from parent banks to their subsidiaries are 25 percent of total balance sheet liabilities (excluding capital) for Romania’s aggregate banking sector, and 35 percent for the Greek subsidiary banks. “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”, the document reveals.

Real GDP will strengthen to an annual average of 3.5 pc in the medium term

Also, S&P considers that the pace of expansion to slow to 1.2 percent in 2012, owing to a moderation in external and domestic demand. “In our view, real GDP will strengthen to an annual average of 3.5 percent in the medium term owing to rising investment, facilitated by the increased use of EU funds and a recovery in foreign direct investment (FDI), which will support household spending and exports” However, private consumption is likely to remain constrained in the short term by the need for continued household deleveraging-foreign-currency household borrowing (mainly euros) accounts for about two-thirds of the loan book. While the currency has stabilized, it is currently about 30 percent weaker in nominal terms against the euro compared with its peak in mid-2007, increasing households’ debt burden in local currency terms. Also, Standard & Poor’s anticipates that net general government debt will peak at about 30 percent of GDP in 2012 before falling very gradually. While general government arrears have declined to 0.2 percent of GDP currently, mainly at the local government level, total state-owned enterprises’ (SOEs’) arrears are high at about 4 percent of GDP.  S&P expects Romania’s current account deficit to remain around 4 percent of GDP in 2012, after having adjusted from 11.6 percent in 2008.  As a conclusion, the rating institution believes that if the government continues to push through with structural measures to improve competitiveness and potential growth, while building a sustained track record of fiscal prudence, as external pressures diminish, S&P could raise the ratings.


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