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Nov 05, 2007 14:02 EEST
November 5 (SeeNews) - Global rating agency Standard & Poor's said on Monday it revised its outlook on EU newcomer Romania to negative from stable reflects the government's limited policy response to Romania's rapidly growing external imbalances, against the background of increasingly difficult global credit conditions.
The 'BBB-/A-3' foreign currency, the 'BBB/A-3' local currency sovereign credit ratings and the 'A-' transfer and convertibility assessment on Romania were affirmed. The Black Sea country joined the EU in January.
Fiscal and incomes policies are expansionary, and the upcoming elections are likely to stimulate further increases in current expenditure, reduce the overall quality of governance, and intensify inflationary pressures, S&P said in a statement. Romania holds elections for members of the European Parliament on November 25.
"This will continue to hinder the government's capacity to respond to mounting external imbalances, while reducing its ability to take full advantage of the benefits of EU membership," S&P credit analyst Marko Mrsnik said in the statement.
"In the short- to medium-term, Romania's pro-cyclical fiscal policy is of particular concern as it reinforces very strong domestic demand growth. Buoyant revenue performance comes mainly from temporary windfall revenues and is masking the underlying fiscal stance. Should growth deteriorate in the future, the fiscal position could weaken significantly," Mrsnik said.
On a positive note, general government debt and contingent liabilities remain at levels considerably below the 'BBB' median.
"We assigned the negative outlook to Romania to reflect its pursuit of policies inappropriate to its growing macroeconomic imbalances. These result from the worsening political environment," Mrsnik said.
The outlook also indicates the potential for a downgrade if the government fails to adjust fiscal and incomes policies to offset widening external imbalances and increasing dependence on external debt financing by the private sector, S&P said.
If external imbalances continue to worsen, and Romania continues to pursue significantly pro-cyclical fiscal and incomes policies, or private sector balance sheet stress causes the economic outlook to deteriorate, it would lead to a downgrade within the next 18-24 months.
On the other hand, political stability that underpins the reorientation of fiscal and incomes policies toward a prudent stance aimed at safeguarding macroeconomic stability, coupled with evidence of subsiding external imbalances and related macro-financial risks, would support an improvement in the outlook to stable, according to the agency.
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