Standard & Poor’s increased the outlook of Romania’s junk credit rating to positive from stable and said it may upgrade it in the second half of next year depending on fiscal rigor and sales of state assets.
The Black Sea country’s long-term government bond rating was maintained at BB+, one level below investment grade and on par with Croatia and Indonesia, S&P said today in a statement.
Romania has struggled to shed its junk rating for five years, embarking on one of the European Union’s toughest austerity programs in 2010 by cutting state wages 25 percent and raising value-added tax by 5 percentage points. The government secured a third international bailout loan this year and has narrowed the budget gap to an estimated 2.5 percent of gross domestic product this year, from 7.2 percent in 2009.
“We could raise the ratings if the planned program of budgetary consolidation, public finance reform, and public enterprise restructuring is implemented in line with our expectations, while keeping external imbalances and financial sector stability in check,” S&P analysts Marko Mrsnik and Frank Gill, said in the statement.
The yield on Romania’s 2020 euro-denominated bonds fell three basis points, or 0.03 percentage point, to 4.09 percent at 11:08 a.m. in Bucharest, according to data compiled by Bloomberg. The cost of insuring its debt against non-payment for five years with credit-default swaps was up 2 basis points to 180. The leu was little changed at 4.453 per euro.
Bond-market history indicates the utility of ratings may be limited. Almost half the time, government bond yields fall when a rating action by S&P or Moody’s suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.
S&P said there was at least a one-in-three chance it could raise the rating by the second half of 2014. It may cut its outlook back to stable if the budget deficit widens ahead of next year’s presidential and European parliamentary elections or if the government falls behind on plans to sell state companies.
“The ratings could also come under downward pressure if Romania’s external imbalances re-emerge or if stability in its financial sector weakens,” S&P said.
Romania’s government plans to further narrow the budget gap to a planned 2.2 percent of GDP next year and sell stakes in state-owned energy companies Hidroelectrica SA, Electrica SA and Oltenia SA, as part of its commitments to the International Monetary Fund and the EU in its bailout package.
Romania’s macroeconomic reality not only justifies the outlook improvement but also a rating upgrade, Budget Minister Liviu Voinea said in a phone interview today.
“The government remains committed to continuing reforms, even in an electoral year,” Voinea said. “Romania will continue to borrow cheaper and cheaper from the market and S&P’s decision is only a confirmation of that direction.”
The cabinet has sold minority stakes in natural gas company Romgaz SA, nuclear-power operator Nuclearelectrica SA and natural-gas grid operator Transgaz SA this year.
“We believe there is a risk that the Romanian government could deviate from its budgetary and structural reform plans in the run-up to elections in 2014,” Mrsnik said. “We recognize, however, that Romania benefits from buffers that should help to maintain investor confidence and keep borrowing costs down.”
The country’s economy expanded 4.1 percent in the third quarter, the fastest pace in the past two years, boosted by a bumper harvest and rising exports.
“We believe Romania’s GDP growth will gradually strengthen over 2013-2016, helped by the continued rebalancing of its economy toward external demand,” Mrsnik said in the statement.
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