Fitch Wire: Romania Consolidation Plan May Have Significant Fiscal, Growth Impacts

  The implementation of Romania’s (BBB-/Negative) latest consolidation package will inform our updated fiscal forecasts at our scheduled sovereign rating review on 15 August, Fitch Ratings says. How far the announced measures improve prospects for debt stabilisation and begin rebuilding fiscal credibility will also reflect our assessment of their macroeconomic impact and potential implementation risks. As we noted following May’s presidential elections, deficit reduction and debt stabilisation are key for the sovereign rating, https://www.fitchratings.com/ reads.The package was approved on 7 July by Prime Minister Ilie Bolojan’s new pro-EU coalition government. The government estimates that its budgetary impact is 1.1% of GDP this year and 3.5% in 2026. The total impact is evenly balanced between revenue and expenditure measures, with the first wave taking effect on 1 August, followed by additional measures from 1 January 2026.Political risks have eased since the previous government introduced a consolidation package in late 2024 amid heightened tensions triggered by the annulment of November’s presidential election. Pro-EU centrist Nicusor Dan won May’s rerun presidential election and the four parties in Bolojan’s coalition collectively represents about two-thirds of the seats in the Chamber of Deputies and the Senate. Dan and Bolojan have both stressed the need for deficit reduction. Agreeing how to reduce record deficits was part of the coalition negotiations that resulted in ambitious consolidation targets.Significant fiscal consolidation will weigh on economic growth, and implementation risks cannot be discounted. More than half the envisaged additional revenue this year comes from a 2pp increase of the standard VAT rate to 21% and of the current reduced rates of 5% and 9% to a single 11% rate from August. This will generate higher inflation, which will further erode real incomes.Bolojan’s proposal to use a fast-track procedure to secure parliamentary approval for the increase without a vote led to the right-wing opposition parties calling a no-confidence motion. The motion was voted on 14 July and failed by a wide margin. But coalition dynamics and the implications for fiscal settings beyond next year could shift as its two largest parties – Bolojan’s centre-right PNL and the centre-left PSD – have agreed that Bolojan will make way for a new prime minister from the PSD in 2027. Romania’s Excessive Deficit Procedure may act as a policy anchor. The European Council on 8 July revised Romania’s recommended nominal net expenditure growth path under its EDP.Romania successfully tapped the international bond market immediately after the announcement of the fiscal consolidation package. A total of EUR5 billion was issued in euros and US dollars, with maturities of five and 10 years, attracting strong investor demand. Government bond yields have dropped from their recent highs in early May, when nationalist George Simion won the first round of the presidential elections, but remain above the levels seen until mid-November 2024.