Fitch Warns: Deficit Cut and Debt Stability Crucial for Romania’s Rating

Prospects for reducing record-high deficits and stabilising rapidly rising public debt remain central to our Fitch Ratings assessment of Romania's sovereign rating following last month's presidential elections, according to Fitch reporting released on Thursday.After years of fiscal slippage and eroded fiscal policy credibility, the next government will face the complex challenge of undertaking a large, multi-year fiscal consolidation process amid modest growth prospects and domestic political fragmentation, says Fitch.Bucharest Mayor Nicusor Dan, an independent, pro-EU centrist, defeated right-wing populist George Simion in the May 18 run-off presidential election. The previous pro-EU coalition collapsed earlier in May after just four months in office following Simion's first-round victory.Dan's victory reduced near-term risks of a prolonged period of heightened political uncertainty potentially accompanied by financial market turbulence. But it remains to be seen if policy effectiveness will improve, given a fragmented legislature and increased social polarisation highlighted by the presidential elections.Developments this year are broadly consistent with Fitch's view that political uncertainty would remain high at least until the presidential elections were re-run after last year's annulment, and that the extended electoral cycle would delay additional fiscal consolidation measures until at least 2H25, as we noted when we affirmed Romania at ?BBB-'/Negative on 21 February.The new president and the prospective coalition parties have acknowledged the magnitude of the fiscal challenges. Media reports indicate that agreeing consolidation plans is an urgent priority in their coalition negotiations, and that Dan has said that a realistic deficit target for this year is 7.5% of GDP. Romania's seven-year medium-term fiscal-structural plan agreed with the EU targets a 7%-of-GDP deficit in 2025.Romania's general government (GG) deficit widened to 9.3% in 2024 from 6.6% in 2023, according to final data. The increase from an initial estimate of 8.7% contributed to GG debt rising to 54.8% of GDP last year, from 48.9% in 2023.The 4M25 budget deficit was RON56 billion (2.95% of projected 2025 GDP), similar to RON57 billion in the same period in 2024.The European Commission projects a 2025 deficit of 8.6% of GDP on a no-policy-change basis. The commission also assumes GDP growth of 1.4%, in line with Fitch's own forecast. However, year-to-date economic data - notably no quarterly GDP growth in 1Q25 - suggest risks to this forecast, underscoring the policy trade-offs involved in reducing the deficit.Although the previous government late last year adopted some fiscal measures, including wage and pension freezes, the weaker-than-expected 2024 outturn means that a larger-than-planned adjustment under the medium-term programme would be needed to meet a 7.5% deficit target. The fiscal consolidation measures that emerge from a coalition agreement will provide a first opportunity to assess in detail how, and how fast, the next government plans to reduce the deficit in 2025 and 2026.EU fund inflows remain important as a direct stimulus to near-term growth and for improving growth potential. A pro-EU presidency and the formation of a durable pro-EU government would support inflows, but meeting conditionality requirements may remain challenging if the political backdrop to policymaking and implementation does not improve. The Commission did not impose financial sanctions on Romania in its Spring Package on June 4 despite the large 2024 deficit, but these remain possible.Fitch's next scheduled sovereign rating review is due on August 15. The agency's assessment of the likely impact of the next government's consolidation plans will be incorporated into its updated fiscal forecasts, alongside any changes to its GDP and other macroeconomic projections.