Romanian central bank backs Fitch worries, Bulgaria defiant

BUCHAREST/SOFIA – Romania’s central bank echoed warnings from Fitch Ratings yesterday after the agency cut its outlook on the country’s debt due to economic risks, while fellow EU newcomer Bulgaria shrugged off a similar move. The ratings agency downgraded the prospects for Romania and Bulgaria to negative from stable, citing the risk of an abrupt economic slowdown due to their large current account deficits. «The decision was widely expected given the international credit crisis and the magnitude of the current account deficit in Romania,» Lucian Croitoru, adviser to central bank governor Mugur Isarescu, told Reuters. «The central bank has warned that the level of the current account deficit cannot be sustained for a long time. The government needs to understand this and act accordingly.» Fitch’s decision adds to a chorus of international warnings that Romania, the larger of the two nations, needs to contain consumption and tighten budget policy to offset the threat of a hard landing for its fast-growing economy. It follows a similar move by Standard & Poor’s agency in November, which lowered its outlook on Romania to negative because it believed that the country’s policy response to economic threats was adequate. Fitch said large current account deficits may be sustainable on their own, but they have become a growing concern because they were continually increasing against a backdrop of global financial turmoil. «Current account deficits in… Bulgaria and Romania have risen to levels that look disconcertingly stretched by current global or historical standards,» said Edward Parker, head of emerging Europe sovereigns at Fitch, in a statement. «The negative outlooks reflect the heightened downside risk of an abrupt slowdown in capital inflows and a costly macroeconomic adjustment.» Buying up Romania and Bulgaria have seen their external deficits balloon in recent years and in particular during 2007, their first year in the European Union. Growth is driven by voracious domestic demand, fueled in part by the desire to improve living standards, as well as technology imports as the countries race to modernize to compete within the wealthy EU. «Concerns have heightened over the past 12 months as macroeconomic imbalances have widened,» Fitch said. However, the Bulgarian central bank said Sofia was shielded by tight fiscal policy, hefty inflows of foreign investment and sufficient hard currency reserves. «There are no reasons for concern,» Kalin Hristov, adviser to Bulgaria’s central bank governor, told Reuters. «Economies with strong growth and tight fiscal policies like ours will continue to attract investors.» Bulgaria runs a currency board which forces the government to run budget surpluses because the central bank has no other means of controlling inflation. But the free-floating Romanian leu has borne the brunt of investors’ concerns about the two new EU members. It has lost 20 percent of its value against the euro since July 2007, when it was trading at five-year highs, due to worries of the sustainability of Romania’s economic progress. «If I saw some chances for the leu to firm in the near future, now I really don’t see any, unless there is a really aggressive rate hike from the central bank on Monday,» said one dealer with a foreign bank in Bucharest. Analysts said the move by Fitch is likely to increase pressure on the Romanian government to tighten fiscal policy to counter growth in domestic consumption. «It puts external pressure on the government to tighten fiscal policy. It was key for Hungary in 2006 and it would be key for Romania as well,» said Lucy Bethell, currency strategist at the Royal Bank of Scotland in London. Fitch estimates 2007 current account deficits at 19.5 percent in Bulgaria and 14 percent in Romania. It expects Romania’s external shortfall to rise to 17.5 percent this year.