Fitch warns political turmoil puts fiscal consolidation at risk in Romania

Fitch warns political turmoil puts fiscal consolidation at risk in Romania
By Iulian Ernst in Bucharest September 8, 2021

The collapse of Romania’s coalition government could disrupt fiscal consolidation efforts, which are key to resolving the negative outlook on Romania’s BBB- rating, Fitch rating agency said in a note sent on September 7, after the junior ruling partner USR-PLUS pulled out of the government leaving the National Liberal Party (PNL) without majority support in parliament.

Political turmoil clouds the (former) coalition’s ambitious reform agenda and the fiscal outlook, the rating agency said.

The government had planned ambitious expenditure and revenue reforms to reduce the deficit to under 3% of GDP in 2024 from 9.3% of GDP in 2020. Romania is expected to send a medium-term fiscal consolidation strategy to the European Commission in October. Fitch’s next scheduled review of Romania’s rating is due on 22 October.

The government had expected to propose a unitary wage and a pension bill by end-2021 and had pledged to increase tax compliance to reduce a large VAT revenue gap.

But little progress has been made in recent months and now the prospects of rapid implementation have diminished further, although the Resilience Plan (PNRR) could still serve as a policy anchor.

Failure to follow the envisaged deficit-reduction path is the main risk to Fitch’s debt projections, the rating agency made clear.

On September 7, the government of PM Florin Citu endorsed a “mild” budget revision, missing the opportunity to capitalise on the quicker-than-expected economic recovery and make a headstart in fiscal consolidation.

The eight-year €10bn public investment programme (‘Anghel Saligny” or PNDL3) also bears negative impact on the fiscal consolidation outlook, although Citu claims that it can be financed from the national budget safely by improving the tax collection.

Finally, there are signs that the electoral race within the liberal party (between Citu and Ludovic Orban) on the one hand, and later between the PNL and the Social Democrats (Romania’s main opposition party), may result in more populist — or at least costly — steps. The energy bill subsidisation law was passed in parliament on September 7 and talks about rising the minimum statutory wage intensified. Both measures are needed, given the rising energy prices and inflation, but they are not going to help the fiscal consolidation and may have pro-cyclical effects.

Buoyant economic growth and Next Generation EU funding still provide a potential path to deficit reduction, but prospects for tackling long-standing fiscal rigidities could deteriorate, Fitch said in its note.

Fitch has consistently stated that the evolution of public finances is the main driver of Romania’s rating. Positive rating action would require confidence that the authorities will implement credible fiscal plans that stabilise general government debt/GDP over the medium term. Lack of progress in implementing reforms, leading to a faster-than-projected increase in public debt, could lead to negative rating action.