Moody's warns any deviation from plan - additional downward pressure on Romania's rating

 The international rating agency Moody's finds the recent fiscal measures assumed by the Romanian government to be 'an important step' toward budgetary balance, however, it warns that any deviation from the proposed plan could undermine stabilisation efforts and place additional downward pressure on the country's sovereign credit rating, according to the Ministry of Finance, which quoted a report the rating agency published on Wednesday.'In its most recent report, published on July 9, Moody's emphasises that the government's plan should reduce the deficit and slow the growth of public debt faster than previously anticipated. According to the report, the fiscal package adopted this week is expected to generate fiscal consolidation of approximately 0.6% of GDP in 2025, with the most significant contribution coming from the VAT rate increases starting August 1, 2025. For 2026, Moody's estimates a fiscal consolidation of about 3% of GDP, due to the cumulative effect of the 2025 measures and those to be implemented in 2026 (such as dividend tax increases and capping the indexation of public sector wages and pensions),' the Finance Ministry release reads.Moody's stresses that full and effective implementation of these measures and fiscal discipline will be essential to return to a sustainable fiscal path, especially given the scope of the planned consolidation.The report highlights several key recommendations and challenges for Romania's fiscal success. Strict adherence to the fiscal targets is crucial to maintaining the country's fiscal credibility and ensuring a sustainable deficit reduction. Any deviation, the agency warns, could weaken stabilisation efforts and place further pressure on Romania's sovereign credit rating.Moody's also points out that implementing the full package of fiscal measures will be a significant challenge. Some measures may fail to produce the expected revenue, either due to implementation flaws or unforeseen economic circumstances. In this context, Moody's recommends that the government be ready to make adjustments if needed, to stay on track with the consolidation programme.Furthermore, the agency views the full implementation of the second fiscal package and reforms under the National Recovery and Resilience Plan (NRRP/PNRR) as crucial for further consolidation and for securing access to EU funds. This second package, which may be adopted by the end of July, could include additional revenue measures and cuts to investment spending in 2025 and 2026, as well as governance reforms for state-owned enterprises and regulatory agencies, contributing further to deficit reduction.Accessing NRRP and EU budget funds is also essential for supporting economic growth, especially in the context of fiscal tightening. Maximising absorption of these funds, Moody's notes, would ease short-term economic pressures and support medium-term growth potential, while also aiding the government's consolidation goals.If the fiscal measures are fully implemented, Moody's estimates that Romania's budget deficit could drop to 7.8% of GDP in 2025 and 6.1% of GDP in 2026. This represents an improvement over previous Moody's projections, which indicated a deficit of 8.3% for this year and 7.7% next year.As for government debt, Moody's now expects it to continue rising, reaching 62.6% of GDP by the end of 2026 (up from 54.8% in 2024), but then leveling off around 66.5% of GDP by 2029. This is below the nearly 71% peak Moody's forecast in March, when Romania's outlook was downgraded to 'negative.'Moody's also refers to its March 14 decision to revise Romania's outlook to 'negative,' noting that a return to a 'stable' outlook is possible if the economic situation improves, specifically if public debt sustainability indicators don't deteriorate as previously expected, the Finance Ministry points out.'Following the vote of confidence received in Brussels on July 8 at the ECOFIN meeting, the Moody's analysis reconfirms that the current government's strategy is sustainable and will help rebuild trust in Romania. We continue to implement the necessary reforms not just to strengthen public finance, but to make Romania an increasingly attractive investment destination, offering more opportunities to all,' said Finance Minister Alexandru Nazare, as quoted in the release.Romania currently holds a 'Baa3' rating from Moody's. Until March 2024, Moody's was the only one of the three major rating agencies (alongside Fitch Ratings and S&P Global Ratings) that maintained a 'stable' outlook on Romania's sovereign rating. Both Fitch and S&P already list Romania with a 'negative' outlook, putting the country one step away from a 'junk' rating (non-investment grade, ed. n.).