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Romania joins emerging debt index, economy set to expand
July 31, 2014 / 10:52 AM / 3 years ago

Romania joins emerging debt index, economy set to expand

* Romanian debt yields fall 100 bps since S&P upgrade

* Poland, Brazil top 15 pct weight, Romania’s seen at 1.65 pct

* Romania has comfortable financing buffer

* IMF delays Romania review pending November presidential poll

By Radu Marinas

BUCHAREST, July 31 (Reuters) - JP Morgan will include Romanian debt in its global index for investment-grade emerging economies from Thursday, a move that should help keep the European Union member’s borrowing costs at record low levels.

Romania is the second country - after Poland - from the EU’s emerging east to join the 13-country, “GBI-EM Global Diversified 15 percent cap index”, which also includes local currency debt of Turkey, Brazil, Malaysia and Russia. Its debt will have an initial estimated weighting of 1.65 percent, JP Morgan said.

News that JP Morgan would include Romania, the EU’s second poorest state, in the index has fuelled demand at leu bond sales in recent weeks and supported the currency.

The inclusion follows Standard & Poor’s upgrade of Romania’s credit rating by one notch to investment grade in May, citing progress in lowering external indebtedness. It had cut Romania to junk at the height of a political crisis five years ago.

“Impact on the market is now muted, largely priced in,” said one dealer with a foreign bank in Bucharest. “But joining this club should be good for the economy in the longer term.”

Debt yields have fallen sharply this year, driven by strong liquidity and persistently low inflation, which has rekindled expectations the central bank will cut rates going forward.

Yields on Romanian bonds maturing in 2021 and 2019 have fallen by 80 and up to 130 basis points respectively since May.

“It had a temporary impact on both the fx and bond market following fresh offshore inflows,” Radu Craciun, chief economist at Romania’s biggest lender BCR - owned by Austria’s Erste Bank - told Reuters.

“This came after a period in which the Romanian sovereign yields came a long way down since the beginning of the year, benefiting from the early 2014 inclusion of (Romania) in a number of global indices, decent macro indicators and the appetite of yield hungry investors.”

Romania, which has a 4 billion euro aid deal led by the International Monetary Fund, is rated Baa3 by Moody’s and BBB- by Fitch Ratings and S&P.

Helped by successive aid deals since 2009 and by austerity policies after a real estate bubble burst, Romania has slowly emerged from recession to record one of the highest economic growth rates in the region, seen at 3 percent this year.

But concerns about fiscal discipline have been raised in the run-up to the vote, likely to pit leftist Prime Minister Victor Ponta against centrist opposition leader Klaus Iohannis.

The IMF has postponed a review of the deal pending the Nov. 2 presidential election and a widely expected Nov. 16 runoff.

“Overall, Romania was able to raise cheaper and cheaper money, the finance ministry building a comfortable buffer. However the trend continuation is not guaranteed and we actually expect a trend reversal,” said Craciun.

“There are signs that looming presidential elections increase the temptation for populist decisions, an early symptom in this respect being the much cooler relations with the IMF these days.” (Editing by Catherine Evans)

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