Rating agency Fitch has revised the outlook on the country’s rating to negative. The rating is BBB-: “Political uncertainty has increased to high levels, and our assessment is that it is likely to have a significant negative effect on fiscal consolidation”.
According to the cited source, the parliamentary elections held after the first round of the presidential elections resulted in a more divided parliament, with a rise in far-right, anti-EU parties, reflecting the increasing polarization of Romanian society.
The election process was annulled by the Constitutional Court after the surprising first-round victory of ultranationalist candidate Călin Georgescu due to alleged foreign/Russian electoral interference.
The Constitutional Court also extended the mandate of current President Klaus Iohannis, which was originally scheduled to end on December 21, 2024, Fitch wrote.
The outlook can be negative, stable, and positive. In March 2023, Romania was upgraded from negative to stable. Typically, an upgrade is followed by another step, from positive to stable. In the context of political developments in Romania, however, the rating has been downgraded.
“A pro-European four-party coalition government is likely to be formed before the end of 2024. However, the sustainability of such a coalition is uncertain and new presidential elections, which could be scheduled for March 2025 at the earliest, will maintain political uncertainty and, in our view, delay the implementation of fiscal consolidation measures,” Fitch says.
The agency estimates that the budget deficit will increase to 8.2% of GDP in 2024, above our August forecast of 7.2%. The higher fiscal deterioration reflects higher spending, including public sector wages and pensions. The impact of the September 2024 pension increase will increase fiscal pressure in 2025, making fiscal consolidation more difficult.
“While we assume that fiscal consolidation will start in 2025, we have revised our budget deficit forecasts to 7.5% of GDP in 2025 and 6.8% in 2026,” the rating agency said.
In Fitch’s view, fiscal consolidation will face the potential negative impact of already low economic growth and the risk that financial market volatility will increase interest costs, further weakening the fiscal position.
“One of the key anchors of economic policy has been compliance with the European framework, but now the Government is targeting an exit from the excessive deficit procedure only in 2031, by bringing the deficit below 3% of GDP,” according to Fitch.
Repeated fiscal slippages
The agency assesses that the credibility of the medium-term fiscal anchor has weakened substantially due to unfounded spending and repeated fiscal slippages. Fitch believes that political uncertainty amplifies these risks. Fitch expects public debt to reach 62% of GDP in 2026, above the BBB-projected level of 56%, and to continue to rise to around 70% of GDP by 2028. In addition, the current account deficit is expected to increase to 8% of GDP in 2024, from 7.3% in 2023. The average BBB rating is only 1%, with Romania far behind. The weak export performance in 2024 highlights the external competitiveness challenges of the Romanian economy.
Economic growth has gradually slowed throughout 2024, and in the third quarter was -3% seasonally adjusted. Exports were particularly weak in 2024, while household consumption has held up due to income growth, fueled by the relaxed fiscal stance. Fitch estimates economic growth of 1.4% in 2025 and 2.2% in 2026.