Romania Pushes to Shed Junk Stigma on Budget Rigor PraiseAndra Timu and Irina Savu
Romania’s call for a credit-rating upgrade has the support of investors and analysts from London to Los Angeles as the country strives to shake off its junk status at Standard & Poor’s after almost five years.
Fiscal progress and International Monetary Fund backstops warrant a higher rating, according to Templeton Emerging Markets Group’s Mark Mobius, Nomura Holdings Inc. and TCW Group Inc. Romania, which S&P has kept one level below investment grade since 2008, deserves a better credit score after narrowing the budget gap to European Union limits, Economy Minister Varujan Vosganian said yesterday.
“I definitely think it’s time for them to upgrade,” Blaise Antin, who helps manage about $10.5 billion of emerging-market debt at TCW, said from Los Angeles. “I’ve liked this credit for a while and I think it’s on an improving trend.”
Romania embarked on one of the EU’s toughest austerity plans in 2010 with a 25 percent cut in state wages and a 5 percentage-point increase in the value-added tax. The government, which arranged two loans from the International Monetary Fund and the EU, trimmed the budget gap to 2.5 percent of economic output last year from 7.2 percent in 2009.
As Romania’s fiscal health has improved, its credit risk has diminished. The cost to insure government debt against non-payment for five years with credit-default swaps dropped to 190 points on Jan. 28, the lowest since 2008, from 490 points on June 5, 2012. The swaps traded at 239 basis points today.
Borrowing costs have also plunged, falling to record lows after some leu-denominated debt was included in the JPMorgan Chase & Co and Barclays Plc local-currency government bond index in March. The leu has rallied 0.6 percent against the euro this year, the best performance in eastern Europe, data compiled by Bloomberg show. It traded at 4.4215 by 4 p.m. in Bucharest.
Yields on Romania’s 2023 dollar-denominated bonds declined four basis points, or 0.04 percentage point, to 4.44 percent today, the lowest level in more than two weeks.
The EU’s second-poorest member is rated Baa3 by Moody’s Investors Service and BBB- by Fitch Ratings, the companies’ lowest investment grades. Moody’s has a negative outlook on the grade, while Fitch’s is stable. S&P rates Romania BB+ with a stable outlook. S&P’s press office wasn’t immediately available to comment when contacted by Bloomberg News yesterday.
Ratings changes aren’t always followed by investors. French bonds and U.S. Treasuries both made gains after the countries were stripped of their AAA credit ratings, in a signal that downgrades may have little bearing on borrowing costs.
Almost half the time, government bond yields fall when an action suggests they should climb, or they increase even as a change signals a decline, according to 38 years of data compiled by Bloomberg.
After ending two years of economic contraction in 2010, Romania averted a recession in the fourth quarter as gross domestic product rose a seasonally adjusted 0.4 percent from the previous three months, according to revised data released today. The nation’s economic stability and stronger public finances warrant a more positive credit assessment, according to Economy Minister Vosganian.
“The rating agencies should upgrade Romania’s sovereign rating,” he told a conference in Bucharest.
To further boost confidence in the country, the government is negotiating a precautionary loan agreement with the IMF to replace its existing 5 billion-euro ($6.4 billion) package, which expires in June and hasn’t been drawn down.
An IMF safety net would be positive for Romania’s credit rating, according to Matteo Napolitano, an analyst at Fitch, which is scheduled to review the country’s grade by the end of June. A backstop “and the straight jacket that the accord will provide” would make an upgrade possible,’’ Peter Attard Montalto, an economist at Nomura in London, said by e-mail.
“The main barriers against an upgrade are a weak economy, a fragile banking system and continued political uncertainties,” Neil Shearing, an economist at Capital Economics Ltd., said by e-mail from London.
A political struggle between Prime Minister Victor Ponta and President Traian Basescu last summer, which prompted European leaders such as German chancellor Angela Merkel to voice concerns over democracy, sent the leu to a record low. Ponta’s coalition won a two-thirds parliamentary majority in Dec. 9 elections, while Basescu was reinstated after a 52-day suspension and a failed impeachment referendum.
Romania’s economy is set to grow 1.6 percent this year, while the budget deficit will probably shrink to 2.4 percent of GDP, according to the European Commission. The government is also selling state assets, including a minority stake in natural gas grid operator Transgaz SA.
“There is a good possibility of a ratings upgrade if the promised reforms by the government come through,” said Mobius, who manages $50 billion in emerging-market assets.