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3/30/99 - FITCH IBCA: Fitch IBCA downgrades Romania
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MAR 30, 1999, M2 Communications - Fitch IBCA, London -- Fitch IBCA, the international rating agency, today downgraded Romania"s Long-term foreign currency rating from "B" to "B-" (B minus). The local currency rating has also been cut to "B-" (B minus) from "BB-"(BB minus). The Short-term foreign currency rating remains unchanged at "B".
Fitch IBCA placed Romania"s Long-term foreign currency rating of "BB-" on Negative RatingAlert in September 1998 and subsequently downgraded the rating to "B" in December due to the impending balance of payments crisis. The agency acknowledged then that the Romanian authorities had at last recognised the seriousness of the situation and were making significant efforts to win financial support from the IMF and World Bank. However, the IMF has since indicated that it expects the Romanian authorities to seek financing from private sector creditors so as to avoid the accusation that it is "bailing out" private creditors and to ensure that any new programme is fully financed. In particular, IMF officials have publicly suggested that around USD500mln of USD660mln of National Bank of Romania and government international bonds maturing in May and June must be "refinanced" by private creditors. The IMF Executive Board is unlikely to have approved new drawings before the payment of USD443mln in principal and interest on a samurai bond due on May 28th.
The Romanian authorities have not approached private creditors (or the Paris Club of official creditors) to seek a formal restructuring of its external debt, though they have held discussions with major international banks on new financing. However, it is highly uncertain as to whether they will be able to secure sufficient new financing to satisfy the IMF and official creditors that the private sector has been "bailed in". In the event that new financing is not forthcoming from private creditors there is a risk that the IMF programme will be postponed or even that the Romanian authorities will be forced to seek a formal rescheduling of USD1.3bln of sovereign international bond issues.
Romania"s external financial position continues to deteriorate. Gross foreign exchange reserves have fallen by USD400mln to USD1.6bln (USD2.5bln including gold) since the beginning of February. The leu has depreciated by 32 per cent since the end of 1998, 12 per cent in the first three weeks of March alone despite leu deposit rates in excess of 180 per cent (annualised monthly inflation is currently running at around 40 per cent). The weakness of the banking system and the collapse in the value of the leu risks igniting inflation and resident capital flight. The NBR faces the unenviable dilemma of using scarce foreign exchange reserves to either support the leu or set aside for forthcoming debt repayments that total USD1.1bln in May and June alone. Romania"s external financing requirement for 1999 is estimated to be USD4.6bln (a current account deficit of USD2.1bln and principal repayments on external debt of USD2.5bln). Moreover, the ability of the government to meet the budget deficit target of two per cent of gdp agreed with the IMF is also undermined by the weakness of the leu and higher than anticipated debt service costs. The Ministry of Finance is finding it increasingly difficult to roll over maturing domestic debt at acceptable yields, putting further pressure on weak public finances.
The underlying cause of the current crisis is the failure to implement much-needed structural reform of the economy. Frustrated with the lack of progress on privatisation, bank and enterprise restructuring, the IMF has insisted that the Romanian authorities reach agreement with the World Bank on structural reform before any new financing programme can be put in place. Good progress has reportedly been made in negotiations between the World Bank and the Romanian authorities on the key issues of privatisation, bank restructuring (especially the rehabilitation of state-owned Bancorex), and the restructuring and closure of major loss-making enterprises. Nevertheless, the violent protest by miners in January and the lack of progress the government has made in closing 49 major loss-making enterprises despite a commitment to do so at the end of 1998, demonstrates the strength of domestic political opposition to restructuring and market reform. The capacity and political will of the government will be tested to the full in its efforts to decisively tackle the structural weakness of the economy and realise the policy objectives it has agreed with the IMF and World Bank. Contact: David Riley, London +44 (0)171 417 4211
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