Bancherul - BANCI / ENGLISH / Moody's annual report on Romania: The outlook for Romania's rating is stable

In its 2011 Annual Report on Romania, Moody's Investors Service provides an assessment of Romania's Baa3 long term ratings and stable outlook. The rating agency's report is an update to the markets and does not constiute a rating action, it said in a press release.

Moody's current ratings on the Government of Romania are:

- Long Term Issuer (domestic and foreign currency) ratings of Baa3
- Senior Unsecured (foreign currency) ratings of Baa3
- Senior Unsecured MTN Progam (domestic currency) ratings of (P)Baa3

RATINGS RATIONALE

Moody's report notes that Romania's low government debt ratios, access to multilateral finance and promising medium term growth outlook support its Baa3 rating, and offset credit challenges such as the country's reliance on foreign capital to fund its savings-investment gap and a poor record in public investment and state enterprise performance.

The Romanian government's debt to GDP ratio was 31% in 2010, and is lower than that of most similarly rated peers. Policy efforts have focused on reducing the fiscal deficit, which rose from 2.9% of GDP in 2007 to 9% in 2009. The deficit is likely to fall under 5% of GDP in 2011, in line with the government's target. Moreover, the government has initiated a number of important structural reform policies this year, which will yield fiscal benefits in the medium term.

Moody's points out that approximately 70% of Romania's exports are to European countries, and a growth downturn in Europe may worsen Romania's newly accelerated growth momentum About 80% of Romania's banking sector is foreign (European) owned. Given the Romanian banking system's high loan/deposit ratios, uncertainties regarding parent bank support could dampen loan growth and constrain foreign currency liquidity in Romania's financial sector, thus becoming a channel for the transmission of the euro area's sovereign debt crisis to Romania.

In Moody's view the external financing risks arising out of the crisis are somewhat mitigated by Romania's ability access international funds via its precautionary Stand-by Agreement with the IMF and precautionary financial EU assistance under the Balance of Payments (BoP) as well as various World Bank loan facilities. Recent reports from the IMF and the EC confirm that Romania has met all targets under the program.

Rating Outlook

The outlook for Romania's rating is stable, incorporating the medium term growth outlook, recent policy reform efforts and external multilateral support. Nonetheless, the broader euro area debt crisis is likely to have an impact on Romania, which is exposed to the crisis via its exports as well as the banking sector. The longer the sovereign and bank funding markets remain volatile, the more likely it is that further credit pressures will develop for most euro area countries. In the absence of policy measures in the near future that significantly stabilise credit markets, we have indicated we will need to revisit the overall architecture of Moody's sovereign ratings, which could lead us to reposition a large number of EU sovereign ratings.

What Could Change the Rating - Up

The ratings would rise on evidence that fiscal prudence observed in the last year can be sustained over the medium term and that medium term growth will accelerate from levels seen in the last two years. Implementation of projects that absorb EU structural funds would also be positive for the rating.

What Could Change the Rating - Down

A reversal of the fiscal consolidation program combined with stasis in structural reform would worsen credit metrics to levels that may eventually be inconsistent with Romania's current Baa3 rating.The rating would also suffer if Romania's growth, financial sector or debt refinancing outlook worsened significantly compared to current forecasts.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.