S&P Lowered Estimates On Incidence Of Recession In Romania

S&P also raised its Banking Industry Country Risk Assessment on Romania to group 7, from the previous group 8 assessment.

"The upgrade reflects the good growth and profitability performance of the Romanian banking sector, following several years of a healthy growth pace and accumulating wealth in the economy, and massive inflow of foreign investments into the banking sector, which has created a solid funding base for credit acceleration," the ratings agency said.

The upgrade also reflects the stronger banking penetration and services coverage, and advancing banking technologies in the Romanian banking sector, analysts noted, adding that these were to a large extent led by the import of Western banking technologies, EU convergence requirements, and the start-up of the adoption of Basel II principles.

"Despite these improvements, the banking industry country risk in Romania is still higher than its peers (Bulgaria, Croatia, Hungary, Lithuania, and Poland). This is due to accumulating economic imbalances, negative spillovers from global financial market tensions, deteriorating operating flexibility due to the increasing scarcity of deposits and capital, high reliance on funding from parental foreign banks, balance sheet currency mismatches, and the country’s still-weak (although progressing) legal and supervisory framework," S&P said.

S&P analysts noted the Romanian banking sector remains small and concentrated, as about 50% of the sector’s assets are held by the five largest banks and is largely dominated by foreign shareholders.

"Strengthened regulatory framework by the National Bank of Romania has, in Standard&Poor’s view, provided a better mechanism for managing potential systemic problems, should they occur. The EU accession in January 2007 provides a strong anchor for the enhancement of banking regulations,” the agency said.

While the country was posting robust growth over the previous several years, the economy now shows clear signs of overheating, analysts said, adding high external imbalances, a procyclical fiscal stance, rising inflation, less stable currency, and the global financial market turmoil are amplifying the risk of a hard landing.

On the positive side, S&P analysts said massive foreign capital inflows, growing domestic demand, and the 2007 EU accession represent significant potential for Romania.