PASSING GRADE FOR INVESTMENTS Fitch improves Romania"s rating

Romania has returned to the investment category, after Fitch Ratings improved its credit ratings for long-term foreign currency loans from "BB+" to "BBB-", with a stable outlook.

This brings Romania to its 2004 level, when Fitch gave us this rating, says Călin Rechea, economic analyst at Banca Carpatica. In his opinion this step is "a positive sign for Romania", but it is not enough to create major effects in the long run: "Had this move been followed by other agencies, maybe it would have sent a stronger, more consistent signal".

Under these circumstances, the effects will be short term and will be targeted at stabilizing the sovereign risk, as they are also "an aid for the leu, to end the downward trend it has followed over the last month or so", Mr. Rechea says.

Călin Rechea said that the exchange rate is facing serious issues, as "we have begun to see foreign investors make their exits, and the trend doesn"t seem to be improving. With a large account deficit that is on the rise, the outlook for the exchange rate isn"t good. At any rate, the raise of the rating isn"t enough to help with that".

• Liviu Voinea: Raising the rating is a perverse incentive to get us to borrow more

Liviu Voinea, the president of the Applied Economics Group (GEA), considers that "the exchange rate will move in a rather narrow band, remaining stable for the most part".

He claims that the raise of the rating by Fitch is a good thing, as long as it doesn"t encourage us to borrow more: "It is a positive thing if we consider that we can borrow at lower rates, but we need to be careful as we are being provided with the perverse incentive of borrowing more. This evaluation is made for speculative capital, which could leave the country just as suddenly as it arrived".

• Cristian Pârvan: Fitch should have improved our rating since the beginning of the year

Raising the rating should determine foreign investors - those who wish to invest in manufacturing, not just those coming in with speculative capital - to regain their confidence in Romania, says Cristian Pârvan, the secretary general of the Association of Romanian Business People (AOAR).

He says that "this positive thing (ed. note: the raise of the rating) should have happened ever since the beginning of the year" and that its main effect may be that Romania"s borrowing cost may become lower for the following issues of Eurobonds scheduled for this year.

Cristian Pârvan considers that the stabilization of the exchange rate needs to be done on economic foundations, and stressed that "the Romanian National Bank only seems to be interested in the welfare of the banking system, and not at all in production, even though there can be no recovery without it".

• Fitch: Overall, we can see a real improvement of Romania"s risk status

The rating for long term loans in lei was revised by Fitch to the upside, from "BBB-" to "BBB", whereas the country rating was raised from "BBB" to "BBB+". The rating for short term loans was revised upward from "B" to "F3".

"The raise of the rating reflects Romania"s progress on the path to recovery from the effects of the financial crisis, which is visible in the resumption of the growth of the GDP, in the solid results on the exports segment, and in the reduction of the current account and budget deficits", said Ed Parker, the head of the EMEA department of the agency. In his opinion, an overall improvement of Romania"s risk status is visible, "in line with a return to the investment grade category".

According to Fitch, Romania"s economic recovery began in 2011, when the GDP advanced 1.6% in the first quarter, over the similar period of 2010, after the country faced one of the worst recessions in the EU. According to the agency, the govt will achieve its target to lower the budget deficit to 4.9% in 2011, from 6.4% in 2010 and from 8.5% in 2009.

However, according to Fitch, more measures to lower the budget deficit are needed, to allow the target of 3% of the GDP to be reached in 2012.

On the issue of factors that could endanger the recovery, the agency mentions non-performing loans, which have reached 13% in April. Still, Fitch says that the banks" capital adequacy ratios are relatively high, and provisions are adequate.

Inflation is relatively high too, according to Fitch (8.4% in May), but the agency expects it to drop in the second quarter.

The agency states that a potential downgrading of the Romania"s rating could be caused by the relaxation of the fiscal discipline, in the context of the elections of November 2012. Furthermore, a potential spillover of foreign shocks, such as the potential problems of the Greek banking sector, might affect Romania"s rating.