Fitch Ratings says Romania's consolidation plan may have significant fiscal, growth impacts

Fitch Ratings said on Tuesday that the implementation of the latest consolidation package announced by the authorities in Bucharest will reflect in its updated fiscal forecasts at the agency's scheduled sovereign rating review on August 15."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," Fitch said in a release.The package was approved on July 7 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 January 1, 2026, the document notes.According to Fitch Ratings, 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 represent 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."A 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," the rating agency said.All three major rating agencies (S&P Global Ratings, Moody's and Fitch) have a "negative" outlook on Romania's sovereign rating, which places the country on the verge of a "junk" rating (not recommended for investment).