Moody's affirms Romania's rating at 'Baa3', yet cautions of risks to implementation of fiscal consolidation programme

Moody's Ratings (Moody's) affirmed on Friday Romania's long-term issuer and senior unsecured ratings at Baa3, yet cautioned of the significant risks to the successful implementation of the country's fiscal consolidation programme.The affirmation of Romania's Baa3 ratings is supported by the economy's solid growth potential and its high wealth levels compared to peers. However, Romania's credit profile is constrained by a high susceptibility to event risk, driven by its elevated exposure to geopolitical risk due to its proximity to the war in Ukraine (Ca stable), Moody's notes.The decision to maintain the negative outlook reflects the significant implementation risks tied to the government's ambitious fiscal consolidation programme. The fiscal measures adopted by the government in July and September this year have materially improved Romania's fiscal outlook relative to the agency's expectations when the outlook was changed to negative from stable in March this year. The combined consolidation measures exceed 3% of GDP in 2025 and 2026, with increases in value added tax and indexation of freezes of public sector wages and pensions being the main contributors, the rating agency argues."However, significant implementation risks remain, related to maintaining political backing for the programme, ensuring spending discipline and hitting revenue-raising targets as well as the risk that the negative growth impact of the package could undermine the fiscal consolidation effort," Moody's goes on to note.Explaining the ratings rationale, Moody's said that it changed the outlook on Romania to negative in March this year to reflect the risk that, in the absence of the adoption of additional fiscal consolidation measures, Romania's fiscal strength would significantly weaken in coming years. "At the time, we expected debt to exceed 70% of GDP by the late 2020s, up from around 50% in 2023. This primarily reflected a fiscal deficit which reached 9.3% of GDP at the end of 2024, and which we then expected would only gradually decline in coming years," the agency argues.The significant fiscal consolidation package adopted by the Romanian Parliament in July, with measures totalling 0.6% of GDP in 2025 and around a further 2.4% of GDP in 2026, led the agency to revise its deficit forecast for 2026 to 6.1% of GDP from an expected 7.7% in March this year, with the assumption of further deficit reduction in 2027 and beyond now leading us to project debt eventually stabilising at around 65% of GDP."However, we see significant risks to the successful implementation of the fiscal consolidation plan, which, if they materialise, would lead to a weaker than expected fiscal outcome, and which merit us maintaining the negative outlook," the agency said.Firstly, it is uncertain whether the four-party coalition (consisting of the liberal PNL and USR parties, the social democrat PSD and the Hungarian-minority UDMR) which was formed in June this year can hold together and maintain political backing for fiscal consolidation in the face of popular and political opposition, Moody's notes. It goes on to say that the successful fiscal consolidation will also remain dependent on the government in due course presenting a detailed plan for continued deficit reduction also in 2027 and beyond. Secondly, the significant consolidation effort could harm economic growth even more than currently assumed, potentially undermining the deficit reduction effort. Thirdly, Romania's track record of weak fiscal policy management could lead to the government struggling to meet the spending and revenue-raising targets included in the plan.Moody's said that the outlook would likely be returned to stable if the government's debt burden and debt affordability metrics were to evolve broadly in line with or more favourably than its current expectations. This would require full and effective implementation of the fiscal consolidation programme adopted in July and September 2025 with the process of fiscal consolidation looking likely to continue also beyond 2026.On the other hand, Romania's Baa3 ratings would likely be downgraded if the agency concludes that the government will not be able to implement its plan for fiscal consolidation in an effective way, leading to the government's key fiscal metrics evolving in a way that is materially worse than our current expectations. Such a scenario would also reflect weaknesses in the ability of the institutions to effectively implement a large and complex consolidation programme. A significant increase in geopolitical risk emanating from the war in Ukraine or increasing pressure on the funding of Romania's elevated current account deficit would also add to negative rating pressures.