Moody's Investors Service has upgraded Romania's country ceiling for foreign currency bonds to Ba1 from Ba3 as the country continues to benefit from policies that conform to prospective membership in the European Union (EU).
The country ceiling for foreign-currency bank deposits was raised to Ba2 from B1 and the government's ratings for foreign- and local- currency bonds have also been raised to Ba1. The outlook on all ratings is positive. Romania's local currency guideline is Aa3.
Romania was designated a "functioning market economy" by the EU in October, and in December the EU reiterated its plan to admit Romania, along with Bulgaria, to its ranks in January 2007. It also accelerated the date for signing the membership treaty to April 2005. Progress on the EU front is recognition of Romania's achievements over the past few years to build and strengthen its economic and politicalinstitutions.
However, the EU reserves the right to exercise safeguard clauses for Romania and Bulgaria that could delay entry by one year -- a practice it did not adopt for first-wave accession countries -- a reminder of how much more remains to be done. According to Moody's, EU membership provides both the framework and incentives for the government to continue along the path of reform while reducing policy variability. EU membership also furnishes support for sustaining the growth momentum now underway and for further improving the government's debt and debt-service burden.
Deepening trade, financial and institutional integration with Europe should also bolster Romania's ability to withstand potentially destabilizing capital flows, says Moody's. The rating agency also recognizes the improvements that have been made in Romania's external liquidity and government finances and debt -- improvements that have occurred in the context of a recovery in growth and declining inflation.
Moody's says that the upgrades balance the benefits of EU accession against the possible risk of overheating. The rapid growth of credit to the private sector (particularly in foreign currency) and the related sharp increases in asset prices and weakening of the current account deficit are a cause of concern. The situation is further complicated by the decision to change later this year the monetary framework from relying on the exchange rate as an implicit anchor to inflation targeting at the same time that the capital account is to be liberalized to allow non-resident investment in local currency instruments.