Romania Regains Investment Grade at S&P on Debt Cuts

Romania regained its investment credit rating after six years at Standard & Poor’s, which cited the country’s success in reducing its external debt and keeping its budget under control.

The country’s long-term sovereign bond rating was raised one step to BBB-, the lowest investment grade, which puts it on par with Russia, Brazil and Spain, S&P said today in a statement. The outlook for the rating is stable, which “balances the likelihood of fiscal and reform programs exceeding our expectations, against the possibility of external imbalances re-emerging,” S&P said.

Romania has struggled to shed its junk rating over the past 5 1/2 years, embarking on one of the European Union’s toughest austerity programs in 2010 by cutting state wages 25 percent and raising the value-added tax by 5 percentage points. The government narrowed the budget gap to an estimated 2.2 percent of economic output this year from 7.2 percent in 2009.

“The upgrade reflects Romania’s rapid progress in improving its external balances and it underlines our view that progress toward consolidating the fiscal accounts and bolstering financial sector stability will continue,” S&P analysts Elliot Hentov and Aarti Sakhuja said in the statement. “We believe Romania will maintain steady economic growth, averaging 3 percent over 2014-2017.”

Bonds, Leu

The leu strengthened 0.1 percent to 4.4340 per euro at 10 a.m. in Bucharest. Romania’s 2024 euro-denominated bonds rose, pushing the yield down 2 basis points, or 0.02 percentage points, to 3.29 percent, according to data compiled by Bloomberg. The cost of insuring Romania’s debt against non-payment for five years with credit-default swaps was little changed at 145 basis points yesterday, down from 184 at the start of the year.

Bond markets often disregard rating and outlook changes. France’s 10-year yield, which was 3.08 percent when S&P removed its top rating in January 2012, tumbled to a record 1.66 percent last year.

From the start of this year, Fitch, Moody’s, S&P and DBRS Inc. had to release announcement schedules for ratings decisions under EU rules introduced in the wake of the region’s debt crisis. Assessors will be restricted to three judgments per year on sovereign borrowers that haven’t asked or paid for a grade, and will need to review ratings at least every six months.

Growth Outlook

Romania’s gross-domestic product grew 3.8 percent in the first quarter from a year earlier, slowing from 5.4 percent in the previous three months, the fastest since 2008.

Economic growth “is above any regional peer, which underlines the return of relatively healthy fundamentals, even if Romania’s national income per capita in 2014 is still roughly equal to its 2008 high,” S&P said.

The former communist country narrowed its current-account deficit to 1.1 percent of GDP last year, the smallest gap since at least 2004.

“While we forecast the deficit to slowly double to 2.1 percent by 2017, this rise nevertheless constitutes structurally lower deficits,” S&P said. “Lower current-account deficits also translate into a healthier external debt profile, with net foreign direct investments exceeding headline deficits at least until 2017.”

Bond Sale

Romania raised 1.25 billion euros ($1.7 billion) on April 15 in its second international bond sale this year, at a record-low yield of 3.7 percent. It sold another $2 billion of dollar-denominated 30- and 10-year bonds on Jan. 14.

The country may be ready to offer yen-denominated bonds in one or two years at it seeks to diversify its debt funding sources, Diana Popescu, deputy director at the country’s Treasury, said in a May 13 interview.

“We expect sovereign indebtedness to remain largely flat over the coming three years,” S&P said. “We do not foresee any lessening in the government’s overall interest burden, as improvements in Romania’s spread are likely to be offset by global trends in rising benchmark interest rates.”

S&P may raise Romania’s rating depending on the continuation of the planned program of budget consolidation and public-finance overhaul and “if public enterprise restructuring is implemented successfully without changing current trends.”

A downgrade could come should the country’s external imbalances re-emerge, the stability in the financial sector weaken, or budget deficits widen significantly, according to the statement.

Romania, which is counting on its third consecutive accord with the International Monetary Fund and the European Union to shield it from market turbulences, is scheduled to hold presidential elections in November.

“Domestic political uncertainty has not recently affected economic performance, but we continue to view Romania’s governance framework as a ratings weakness,” S&P said today.

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