Fitch: The high budget deficit causes negative pressure on Romania's rating

Romania should take measures to limit the growth of the budgetary deficit, which becomes the highest in the EU in order to avoid losing the rating in the category investment- grade (recommended for investments) according to the analysts of the financial evaluation agency Fitch Ratings, says Bloomberg.   The state at the Black Sea with the lowest 'investment-grade' rating from all major financial rating agencies may have to freeze spending and increase revenues to reduce its deficit to the EU limit of 3% of GDP, according to a report published  on Tuesday by analysts Federico Barriga Salazar and Gergely Kiss from Fitch.   The budget deficit is on schedule to be reduced at 5.8% of GDP from an estimated level of 7% of GDP  this year, without any significant effort of fiscal austerity. The slower process will trigger a growth of  the public debt towards 80% of GPD  in 2037, an ' extremely high level for Romania' which would exceed the average of countries with a similar rating, says Fitch.   'The negative pressure on the rating could increase, especially if there are adverse effects of contagion from fiscal weakness on political credibility' Salazar and Kiss assessed, adding that Romania could need more than four years to reduce its public debt.   The Romanian government has difficulty in keeping under control the debt that surpasses this year 50% of GDP with expenses for programmes, including the increase of pensions. Some weeks before the presidential and parliamentary elections of 24 November, both big parties - which form the coalition governing from Bucharest - relies on the increase of pensions in a country with 19 million inhabitants. Romania which has been in excessive deficit procedure since 2020, required the  European Commission to allow a period of seven years starting with 2024 to reduce the deficit towards the target of 3% of GDPm but it has not presented any clear plan for reaching this target.   Faced with the risk of bigger than expected deficit this year, the coalition took some measures to limit spending and granted an amnesty to citizens to pay back taxes.More changes are expected after the elections.   On August 30, the Fitch rating agency reconfirmed Romania's government debt rating at BBB-/F3 for long -term and short-term foreign currency debt, as well as the stable outlook.    The decision to reconfirm the sovereign rating and maintain the stable outlook is supported, in the agency's opinion, by the membership status of the European Union and the capital inflows from the European Union that support the real convergence of incomes, external finances and macroeconomic stability of the country, as well as by the positive evolutin of GDP per capita and of governance and human development indicators, which are at higher levels than countries in the same rating category ("BBB").   According to the agency, Romania's economy will register an increase of 2.5% in 2024, the considerable flows of European funds including cohesion funds from the Multiannual Financial Framework (2021 - 2027)and the funds for recovery and resilience will continue to support growth and investments for a medium term. 'The Fitch agency estimates that the public debt against GDP wil register an increase, but within the limits of sovereign with a similar rating and the level of the present medium ' BBB" which is situated at 58.3%' says the press release.   The main factors which could lead individually or collectively to the improvement of the country rating or the outlook are the continous reduction of the budgetary deficit, which would influence the drop on medium term of the public debt expressed as a percentage from GDP as well as the structural improvement of the position of the current account through the reduction of the foreign debt and the risks regarding foreign financing.