A drop in liquidities threatens Romania

Romania ranks fifth among countries in Europe, the Middle East, and Africa (EMEA), with the greatest exposure to risks associated with expansion and intensification of the current accentuated drop in liquidities on monetary markets, according to the world’s foremost provider of credit ratings, Standard&Poor’s (S&P).
A number of countries, including Romania, risk being strongly affected by maintaining current loan granting conditions, with the top four being Latvia, Iceland, Bulgaria, and Turkey, according to the Liquidity Vulnerability Index, computed by S&P and included in the report entitled "Which Way Now For EMEA Sovereign Ratings, As The Credit Cycle Turns Sour?" Romania, and countries in Central and Eastern Europe have had little exposure to the high-risk mortgage crisis in the United States.
"Our EMEA sovereign ratings have thus been consistent, successfully avoiding cyclicality and indiscrimate and generalized upgrades while the rising liquidity tide had benefited all emerging economies," said Moritz Kraemer, Credit Analyst at S&P.
In order to compute the indicator, S&P includes sovereign debt rollover needs as a share of GDP; gross external borrowing requirements as a share of current account receipts; gross external financing requirements net of foreign direct investment inflows as a share of usable official foreign exchange reserves; the share of a current account deficit financed through foreign direct investment; and the real effective exchange rate appreciation in 2007 from the average of the 1990s. The current account deficit estimated by analysts might reach 14 percent of GDP this year, considering that direct foreign investments covers only 40 percent of that deficit.
"Over the past 24 months however we have lowered ratings or outlooks for a number of sovereigns in the sample with deteriorating credit fundamentals," Kraemer added.
Decisions regarding the modification of ratings depend on the reaction of authorities to the evolution of the economic environment. S&P's rating for Romania is "BBB minus". Russia, Egypt, Ukraine, and the Czech Republic are least affected by fluctuations on capital markets.
If the loan market increases rapidly, lenders must support an ever increasing gap between assets and deposits, and rely more on bonds and interbanking  loans than Western banks to ensure necessary liquidities.