February 27, 2015 / 9:11 PM / in 5 years

Fitch Affirms Romania at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, February 27 (Fitch) Fitch Ratings has affirmed Romania's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-'and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Romania's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-'and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB+' and the Short-term foreign currency IDR at 'F3'. KEY RATING DRIVERS Romania's ratings are underpinned by its marginally better fiscal position than its 'BBB' peers, and its relatively positive economic outlook, with GDP expected to grow at close to potential over the next two years. However, the rating is constrained by structural weaknesses in the economy, which continue to constrain progress towards more positive developments in the banking sector, business environment and income convergence towards higher rated peers. The affirmation and Stable Outlook also reflect the following factors: Real GDP growth has performed better than Fitch's expectations. High frequency indicators on retail trade and industrial production continue to support a resilient recovery in domestic demand, offsetting lower growth in net exports. For 2015 and 2016, Fitch forecasts Romania to grow close to potential, at real growth rates of 2.7% and 2.8%, respectively. Higher than expected absorption of EU funds by the government could contribute upside risks. On the other hand, a weaker external environment and/or faster than expected deleveraging by Romanian banks could create downside risks. Economic growth in Romania is presently supported by an accommodative monetary policy environment. With the current policy rate at 225bps, there is flexibility for the National Bank of Romania (NBR) to adjust policy rates to support price stability. Recent supply-side factors (i.e. low food and energy prices) have kept inflation at levels below the NBR's inflation target band (2.5% plus or minus 1%). However, in 2H15 we expect a gradual pick-up in demand-pull inflationary pressures, leading to average inflation of 1.1% in 2015 and 2.3% in 2016. On fiscal finances, Fitch is projecting a slightly weaker revenue and expenditure forecast than the government for 2015. Contrary to the government's target to meet its medium-term objective (MTO) this year (structural fiscal deficit 1.0% of GDP and headline fiscal deficit of 1.2% of GDP), Fitch's forecast is for a headline fiscal deficit 1.5% of GDP. We also project general government debt-to-GDP to peak at around 39% of GDP. Both the deficit and debt ratios are still below the 'BBB' medians (fiscal deficit of 2.7% of GDP and debt ratio of 41% of GDP). However, recent government discussions on changes to its fiscal code, which will mean a much looser fiscal stance over the medium term driven by various tax cuts, pose a downside risk on Fitch's assessment of Romania's public finances. Romania's banking sector is well capitalised (Tier 1 capital adequacy ratio 15% end 2014), and on-going deleveraging efforts by banks have helped bring down the share of non-performing loans in the sector to 14% (end-2014) from 22% back in 2013. Meanwhile, the ratio of loan-to deposits has fallen to 91.3% (end-2014) from 105% in 2013. Nonetheless, risks to Romania's banking sector are skewed to the downside. A relatively large share of foreign-currency loans (56.3% of total loan stock, end 2014) exposes the sector to exchange rate volatilities, as the recent appreciation in the Swiss franc (CHF) has demonstrated for Romanian CHF-denominated debt holders. The stock of CHF-denominated loans in Romania (1.4% of GDP) is small compared with Poland (8% of GDP) and Hungary (12% of GDP). Overall, the relatively small size of the banking sector and the dominance of foreign-owned banks mitigates the risk of contingent liabilities crystallising on the sovereign balance sheet. Romania's current account deficit (CAD) has narrowed significantly in recent years from a five-year average up to 2013 of 3.7% of GDP to 0.9% of GDP in 2014, leaving it below the 2.0% median CAD of 'BBB' peers. A lower CAD and our projection for higher net FDI inflows (averaging 2% of GDP in 2015-2016) should facilitate comfortable financing of the CAD in the near term. However, Romania's external finances are weighed down by a high net external debt ratio (36% of GDP in 2014), which is significantly above the 'BBB' median (4.6% of GDP), and previous expectations of a material fall in this ratio have not been met. Romania's ratings are constrained by a number of structural weaknesses, including the dominance of industry by inefficient state-owned entities and weak public infrastructure. Structural bottlenecks constrain Romania achieving stronger growth rates, and limit the country's convergence progress towards western European standards of living. Romania is one of the poorest EU states. GDP per capita is below the 'BBB' median and 55% of the EU average. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger negative rating action are: - A significant fiscal loosening that jeopardises the stability of public finances and pushes Romania's public debt ratio above the 'BBB' median. - A sustained loss of momentum in the implementation of key structural reforms, for instance as a result of prolonged political instability. - External macroeconomic or geopolitical shocks that significantly erode Romania's fiscal and external buffers. The main factors that could, individually, or collectively, trigger positive rating action include: - Higher trend economic growth and progressive convergence towards income levels of higher rated peers. - A faster and sustained reduction in external debt ratios. - Positive progress in structural reform, addressing the weak quality of infrastructure and the dominance of industry by inefficient state-owned entities. KEY ASSUMPTIONS Fitch assumes that the government will continue to work towards attaining its MTO of a structural budget deficit of 1% of GDP. Fitch assumes that under severe financial stress, support for Romanian subsidiary banks would come first and foremost from their foreign parent banks. Fitch assumes the eurozone will avoid long-lasting deflation, such as that experienced by Japan from the 1990s. Fitch also assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. Contact: Primary Analyst Kit Ling Yeung Analyst +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Vincent Forest Associate Director +44 20 3530 1080 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 12 August 2014 and 'Country Ceilings' dated 28 August 2014, are available at www.fitchratings.com. Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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