US financial rating agency Moody's has decided to upgrade Romania's country rating by two steps to Ba1. This is one level below the category of low risk countries rated "investment grade".
So far only one of the three major rating agencies has placed Romania in this category (Fitch).
The announcement did not give rise to any significant changes in the prices of eurobonds issued by Romania and in circulation on the market, given that interest rate spreads had already became uninterestingly low compared with yields on placements in ROL.
What prompted this upgrade? "Progress on the EU front is recognition of Romania's achievements over the past few years to build and strengthen its economic and political institutions," a Moody's release says.
The outlook on the rating is positive.
Moody's also mentioned that Romania was designated "functioning market economy" status by the EU in October 2004 and in December the EU reiterated its plan to admit Romania and Bulgaria to its ranks in January 2007.
The American rating agency explained that the ratings upgrade to Ba1 takes into account the "possible" risk of overheating. "The rapid growth of credit to the private sector, particularly in foreign currency, and the related sharp increases in asset prices and weakening of the current account deficit are a cause of concern."
The situation is further complicated by the decision to change the monetary framework later this year from one relying on the exchange rate as an implicit anchor to inflation targeting, something which will happen at the same time that the capital account is liberalised to allow non-resident investment in local currency instruments.
According to Moody's, EU membership provides both the framework and incentives for the government to continue along the path of reform while reducing policy variability.
EU membership also furnishes support for sustaining the growth momentum now underway and for further improving the government's debt and debt-service burden. Deepening trade, financial and institutional integration with Europe should also bolster Romania's ability to withstand potentially destabilising capital flows.
The rating agency also recognises the improvements that have been made in Romania's external liquidity and government finances and debt - improvements that occurred in the context of a recovery in growth and declining inflation.
razvan.voican@zf.ro
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