IMF: Romania’s Capacity To Repay Loan Is Strong, But There Are Risks

"By the end of the arrangement, Fund exposure to Romania is projected to be about 10% of GDP, nearly 40% of gross reserves, higher than the average for recent exceptional access cases. While this exposure is large, the associated risks to servicing such an exposure are mitigated by the relatively low level of public debt," according to the IMF.

Romania and the IMF signed in May a EUR12.95 billion (11.443 billion Special Drawing Rights – SDR) two-year stand-by arrangement, as part of a EUR19.95 billion financial support package that also includes funds from the European Commission, the World Bank, and the European Bank for Reconstruction and Development.

Romania will start paying back the loan in 2012, when it has to repay SDR1.307 billion.

A SDR is a reserve asset created by the IMF, with a currency value determined daily, based on currency market rates of four major currencies. Currently, a SDR is worth around EUR1.1.

The largest part of the stand-by arrangement will be reimbursed in 2013 and 2014, SDR4.324 billion and SDR4.305 billion, respectively. In the following year, Romania has to repay SDR1.398 billion, while the rest of SDR109 million will be reimbursed in 2016, according to the Technical Memorandum of Understanding of the agreement.

"Romania’s strong political commitment to the IMF-supported program and its excellent track record servicing external obligations, also provide comfort that it will fulfill its financial obligations to the Fund in a timely manner," according to the Fund.

But the IMF noted that, notwithstanding these assurances, Romania’s capacity to repay the loan could be jeopardized by adverse political and economic developments at home and abroad.

"While the president, prime minister, and both parties in the coalition signed off on the Fund-supported program, October presidential elections could strain their alliance, and ultimately undermine an effective implementation of the program. If adjustment is incomplete, higher balance of payments and fiscal disequilibria could provoke capital flight and risks to Romania’s ability to repay," IMF said.

There is also a risk that the global downturn will deepen further than currently foreseen, or that its recovery will be more protracted.

Finally, IMF noted that it is possible that foreign banks will be unable to maintain their exposure to Romania despite their commitment to do so, given the regional dimensions of the financial sector crisis and of their operations.

"For these reasons, the balance of payment gap during 2009-2010 could prove larger than projected under the program, or balance of payments pressures could extend beyond 2010, impairing Romania’s ability to repay the Fund," according to the IMF.