Following its recent affirmation of Romania's BBB- rating with a stable outlook, ratings agency Fitch has provided more details on what its analysts view as the current strength and weaknesses, threats to and opportunities for Romania's economy.

Many of the usual suspects, the good and the ill, appear in Fitch's country analysis; government deficit reduction from the 9 percent of GDP peak in 2009 to a six-year 2.9 percent low in 2012 on the one hand and on the other, weak growth of 0.7 percent due to the poor harvest in 2012 and difficulties experienced by eurozone trading partners and, of course, the much maligned poor EU funds absorption rate.

Fitch predicts 1.2 percent GDP growth in 2013, more conservative than the government's 1.6 percent figure, which the IMF echoed in its own forecast. The Fitch prediction comes with a proviso: “Fitch expects GDP growth to pick up to 1.2%, on the assumption of a reduction in the fiscal drag and a normal agricultural harvest.” But unlike other predictions that give an improvement in EU funds absorption rates as a condition, Fitch assumes the rate will remain low, saying that this, coupled with “past delays in reforming the large and inefficient state-owned enterprise (SOE) sector will hold back growth in the next two years.”

Despite the difficulties that Romania has had in meeting all the conditions set by the IMF under the current Standby Arrangement, the ratings agency believes that the country will successfully complete the current EC/EU/IMF agreement by the extended June 2013 deadline. The question of what to do next has been raised and the government has expressed a wish for new agreement. Fitch comes out clearly in favor of a new IMF deal being struck when the current Standby Arrangement has been completed. A new IMF agreement that sets strict targets in structural reform would be beneficial to Romania's long term growth prospects, according to Fitch ratings.

Fitch paints Romania's state-owned enterprises as something of a lead weight on the country's economy. The 1,000 or so state owned businesses “are loss-making as a whole, placing a drain on the public purse,” according to Fitch. Quoting IMF data, Fitch puts a figure of 0.5 percent of GDP on the annual cost of subsidizing state companies.

After last year's upheaval, Fitch considers that the relatively stable political situation affords an opportunity to make progress in the reform of the public sector. The recent chumminess of relations between PM Victor Ponta and President Basescu, along with the outright majority the governing Social Liberal Union enjoys suggest that Romania can press on with state owned enterprise reform.

However, while PM Ponta is trumpeting this new Pax Romana in Strasbourg and receiving approving nods for achieving a working relationship with the president, Fitch sees a Crin Antonescu shaped shadow on the horizon. Future instability of the USL and a rift between National Liberal Party leader and USL co-head Antonescu and Ponta's Social Democratic Party is looking more and more probable. As 2012 proved, political instability is likely to slow down or halt reform in the public sector and the privatization of state-owned assets. Fitch also notes the potential social and political fall-out from unpopular public sector reforms and with the current government having gained power on the back of public reaction to health sector changes, it could be argued that it is an important point.

Overall, Fitch's stable outlook for Romania is very much a balance of opposing forces, rather than a homogenous set of conditions that all point to a status-quo. On the one hand, “a renewed deterioration in the eurozone debt crisis” and backsliding on fiscal consolidation and structural reforms would negatively affect the country's rating, while “a successful reform drive, accompanied by better absorption of EU funds with a recovery in the broader EU economy” would improve Romania's outlook.

Liam Lever, liam@romania-insider.com