Rating agency Standard & Poor’s upgraded Romania to investment grade for the first time since 2008 as it appreciates that Romania is making progress in reducing its external indebtedness and fiscal consolidation and financial sector stability continue to be on track.

Romania’s long-term sovereign bond rating was raised to BBB-, from BB+, S&P said on Friday, May 16, in a statement.

„The upgrade reflects Romania's rapid progress in improving its external balances. It also underlines our view that progress toward consolidating the fiscal accounts and bolstering financial sector stability will continue,” Standard & Poor’s says in its statement.

S&P analysts believe that Romania will maintain steady GDP growth, averaging 3 percent over 2014-2017. „While this is slower than before the 2009 financial crisis, it is above any regional peer. This underlines the return of relatively healthy fundamentals, even if Romania's national income per capita in 2014 is still roughly equal to its 2008 high. In 2013 and 2014, external demand has been driving growth and we expect a gradual shift toward domestic demand with net exports slightly dragging on growth in 2016-2017.”

S&P doesn’t see a reverse in Romania’s external account which posted lower deficit in 2013 on structural changes. „Romania's shift toward a more open economy means that exports now constitute 42 percent  of GDP, compared to 31 percent  in 2009. Rapid export growth and flat import demand in 2013 helped lower the current account deficit to 1.1 percent of GDP, its lowest in two decades," the ratings agency explained.

It went on: "While we forecast the deficit to slowly double to 2.1 percent  by 2017, this rise nevertheless constitutes structurally lower deficits. The underlying reasons appear to be increased value-added (seen in the declining imports-to-exports ratio) and overall increased energy efficiency in the export sector. These recent trends are unlikely to be reversed in the medium term.”

The rating agency also says that Romania’s external debt is bound to decline by 2017 and expects an increased absorbtion rate of EU structural funds which should further support Romania’s external deleveraging.

S&P also appreciates the progress made by Romania regarding its fiscal consolidation, under the supervision of the International Monetary Fund (IMF), and forecasts that the general government deficit should remain below 2 percent of GDP.

Romania’s political uncertainty remains one of the key risks, along with the situation in the region. „Domestic political uncertainty has not recently affected economic performance, but we continue to view Romania's governance framework as a ratings weakness. Emerging geopolitical risks should also be contained as Romania's economic links with Ukraine and Russia remain fairly limited (for instance, combined exports and imports are less than 5 percent of total exports and imports) and we do not foresee any direct security implications,” S&P says.

The outlook for Romania’s rating is stable. The BBB- rating is the lowest investment grade. This rating puts Romania on par with Spain, Brazil, India and Russia. Romania also has investment grade rating from the other two big rating agencies, Fitch and Moody’s.

Andrei Chirileasa, andrei@romania-insider.com