Standard & Poor’s (S&P) Ratings Services said on May 17 that the credit ratings of Bulgaria and Romania will depend on their fiscal stability.

The sovereign ratings of European Union hopefuls Bulgaria and Romania depend more on the maintenance of stable fiscal and monetary policies through EU accession than on the precise entry date, S&P said, quoted by the service SEE News.

“EU membership itself will unlock large amounts in structural and cohesion funds, and if properly invested, these could contribute significantly to improvements in the economic structure of Bulgaria and Romania, providing support for future rating upgrades,” said S&P’s credit analyst Remy Salters in a report.

The executive body of the 25-member union gave on Tuesday a rather unclear ruling on whether Bulgaria and Romania would join the EU in 2007. According to experts, however, there is no serious reason so far to believe that one of them or both would be delayed by one year.

Shortcomings in the preparedness of both countries made the European Commission delay its final recommendation until October.
Salters warned that the experience of the previous wave of enlargement showed that, in the short term, the effects of EU accession could also have a destabilising effect, particularly in the fiscal sphere, as a result of requirements for co-financing by the governments.

Romania and Bulgaria are to receive EU aid worth 11.5 billion euro and 4.6 billion euro, respectively, over the period 2007-2009.

Romania is facing a bigger challenge to restrict its fiscal stance, because it is already looser than in Bulgaria and could place a risk of overheating, said the S&P report, examining the main constraining factors for the ratings on the two sovereigns.

Bulgaria’s northern neighbour has very low levels of revenue and expenditures as a proportion of GDP, which would enforce the need for additional room for manoeuvre in order to accommodate the extra costs associated with EU membership.

Romania might need to expand the tax base, improve tax collection and/or raise taxes where possible, as well as monitor closely the evolution of current spending, especially the public sector wage bill, and maintain the momentum behind public enterprise restructuring, the report said.

Both Bulgaria and Romania had high current account deficits for 2005 at about 12 and 9 per cent of GDP, respectively, increasing their background exposure to financing risks in the event of reversals in foreign capital inflows, S&P said.

The report highlights that Bulgaria’s and Romania’s European Monetary Union (EMU) entry would be a positive step for sovereigns displaying external weaknesses, “as membership in the EMU effectively precludes any direct effects from balance-of-payments pressures”.

However, the counterpart to this EMU advantage is a higher weight given to fiscal indicators and the competitiveness of the economic structure, since joining the euro implies a total loss of monetary flexibility, the report said.