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Oct 02, 2009 13:03 EEST
BUCHAREST (Romania), October 2 (SeeNews) – Following the collapse of Romania's coalition cabinet global rating agency Fitch said the potential for political uncertainty ahead of November's presidential elections is already factored into the country's sovereign ratings, but pressure for a downgrade could increase if authorities fail to meet policy commitments agreed with the International Monetary Fund (IMF).
Fitch issued the following statement late on Thursday:
“Fitch Ratings says that, following the collapse of Romania's coalition government, the potential for political uncertainty ahead of November's presidential elections is already factored into the sovereign ratings. However, in the event of a significant deterioration in the coherence and credibility of economic policy-making, pressure for a downgrade could increase. Romania's Long-term foreign currency Issuer Default Rating (IDR) is 'BB+' and the Long-term local currency IDR is 'BBB-', both with Negative Outlooks.
"The key sovereign rating implication will be the impact, if any, on the Romanian authorities' ability to stick to their policy commitments under the IMF-backed adjustment programme, including reining in the budget deficit," said Andrew Colquhoun, Director in Fitch's Sovereigns Group. "Failure of the IMF programme would intensify downwards pressure on the ratings."
Fitch today released new global forecasts, cutting its projection for Romania's 2009 GDP contraction to 7.5% from the previous 5.5% forecast (see "Sovereign Data Comparator", available from www.fitchratings.com), with the current account deficit at 7% of GDP. Fitch also projects the fiscal deficit at 7% of GDP, leaving little room for manoeuvre below the -7.3% ceiling agreed with the IMF. The IMF disbursed a further USD2.7bn of Romania's Stand-By Arrangement on 21 September, bringing total disbursements so far to USD9.7bn from a programme total of USD18.2bn. The IMF widened Romania's deficit target for 2009 to 7.3% from 4.6%, recognising the deterioration in growth prospects for the global and Romanian economies. Signs of recovery in the global economy may leave the IMF less inclined to tolerate any further fiscal easing in the next review, scheduled for mid-December.
The centre-left PSD pulled out from its coalition with the centrist PDL apparently over a dispute to do with the conduct of November's presidential elections, in which the incumbent, the PDL-linked Traian Basescu, will likely face his strongest challenge from the PSD's Mircea Geoana. Economic policy does not appear to have sparked the political crisis, enhancing prospects for a new PDL-led coalition or stand-alone PDL minority government to find a parliamentary majority for necessary policy measures - including, crucially, any 2009 budget revisions required to bring the deficit into line with the 7.3% of GDP ceiling. Fitch notes the potential for politicians to resort to deficit-boosting populist gestures ahead of the presidential elections. Fitch expects that failure to agree a budget for 2010 would see Romania revert to 2009 cash expenditures, which would not be enough to deliver a significantly lower budget deficit, given likely slow nominal GDP growth in 2010.
Further political uncertainty could also dent investor and depositor confidence in Romania and its financial system. The IMF's latest press release noted the potential for further exchange-rate volatility and/or stresses in the banking system to derail Romania's adjustment. A sharp and sustained fall in the RON would add to pressures on asset quality in the heavily-euroised banking system and complicate the ongoing adjustment of Romania's economy towards stronger net exports. Fitch does not believe that recent developments signal a weakening of Romania's fundamental political stability, anchored since 2007 by EU membership. However, signs of a breakdown of basic democratic norms would likely damage confidence and add to negative pressure on the ratings. Successful adherence to the IMF-backed programme leading to clear evidence of a sustainable recovery, with narrower fiscal and current-account deficits, would ease pressure for a downgrade.”
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