Moody's May Revise Up Forecasts On Romania's GDP Contraction, Budget Deficit

Moody’s might revise its forecasts on Romania’s gross domestic product contraction and budget deficit, to reflect a worsening of these indicators, but the ratings agency does not expect a failure of the International Monetary Fund-backed financing program.

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“Our most recent forecasts are for GDP to contract by about 4%, but I would say that will probably be revised higher (i.e. the contraction will be larger) soon. We expect a budget deficit of 5.1% of GDP (again, could be larger),” Moody’s analyst Kenneth Orchard told MEDIAFAX.

Romania’s current rating is predicated upon the successful continuation of the program agreed with the IMF and the EU; however, failure to continue with this program could lead to downward pressures on the rating, Orchard said.

Romania and the IMF closed in May a EUR12.95 billion two-year stand-by arrangement. The first tranche, worth of about EUR5 billion, was released after the IMF Board approved the loan.

“The outlook on the rating is stable. Generally speaking, Moody's is highly unlikely to upgrade any country that is in the early stages of an IMF program,” Orchard said.

Moody’s deems an abrupt failure of the plan is “extremely unlikely”. However, if Romania fails to meet the targets, Moody’s expect that the IMF and the EU will work closely with the Romanian authorities to build up a stabilization plan, Orchard added.

IMF sees a 4.1% contraction of Romania’s GDP in 2009, while for 2010 the Fund estimates a zero economic growth.

Tonny Lybek, the head of the IMF mission in Romania and Bulgaria, recently said Romania’s GDP drop in the first quarter might point to a possible economic contraction by more than 4.1% in 2009.

In the first quarter of 2009, Romania’s GDP fell 6.2% on the year, according to the country’s Statistics Institute.

Romania’s consolidated budget posted a deficit of 2.2% of the GDP after the first five months, from 1.8% of the GDP at the end of April, according to the ministry’s preliminary data.

Romania negotiated with the IMF a budget deficit target of 4.6% of the GDP, namely 24.36 billion lei (EUR1=RON4.2181) in 2009, based on RON166.72 billion revenues, not including EU funds, and RON182.72 billion primary expenditures. Computed based on EU methodology, the budget deficit target is of 5.1% of the GDP.

Moody's affirmed Romania's Baa3 ratings with a stable outlook in March 2009, considering the deteriorating macroeconomic picture against the financial support package from the EU and IMF, combined with additional measures to reform fiscal policy and the public sector.

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