Moody’s: Romania Needs Around 40 Yrs To Converge To EU Average

"The combination of a reasonable business environment, EU membership, and improving physical and social infrastructure – bolstered by EU funds – should sustain superior investment rates over time, allowing a gradual rise in real income towards the EU average. Nevertheless, this trend will take considerable time, probably around forty years," Moody’s report reads.

Moody’s assesses Romania’s long-term economic strength to be high, mainly because Romania is significantly poorer than most other EU countries.

"Moody’s expects Romania’s recovery path to be gradual. Economic growth is unlikely to reach pre-crisis rates for sustained periods, especially if European economic growth remains muted. A more normal long-term growth rate for the country is probably 3-4% per annum, bearing in mind that there are still several obstacles to rapid growth in Romania, particularly a heavy structural reform agenda and lacklustre infrastructure. At this pace, however, income will take a relatively long time to converge to the EU average,” according to the report.

Romania’s economy boomed between 2001 and 2008, averaging 6.2% real growth per year even as the population declined.

The rating agency estimates the Romanian economy would contract by 8.9% this year, but will post a 1.2% growth in 2010.

Moody’s analysts added that signs that growth was becoming unsustainable became more pronounced in 2006 and 2007, as asset prices soared, the current account deficit jumped and domestic credit growth accelerated.

A surge in external borrowing and government spending leading up to the elections in autumn 2008 also increased the country’s vulnerability to the deteriorating global economic environment, the report reads.

Moody’s considers that Romania’s return to growth may come more quickly than for other countries in the region, such as Bulgaria or the Baltics, because the Romanian private sector is less leveraged, and because of the flexible exchange rate which is easing the adjustment in the trade balance.

"On the other hand, the recession, coming after an extended, credit-fuelled boom, could be more protracted than expected and cause serious economic dislocation. Output will need to re-orientate towards tradeable goods and services, which means that corporate insolvencies and unemployment are likely to continue to rise for some time," according to the agency.

Moody’s is the only major rating agency that still has Romania on a stable, investment-friendly recommendation, after Fitch and Standard & Poor’s placed Romania’s rating in "junk" category last fall.

In the second quarter, the economy fell 8.7% on the year, and 1.1% compared with the first quarter, according to the National Statistics Institute.

Romania agreed in March with the IMF a EUR12.95 billion two-year stand-by loan, as part of a EUR19.95 billion financial rescue package that also includes funds from the European Commission and other international institutions.