International rating agency Fitch affirmed Romania's BBB-/negative sovereign rating, noting, besides the twin current account and budget deficits, the political instability caused by repeated presidential elections and a more fragile majority in parliament for the ruling coalition.

"Fitch also lists the challenges for the next period and gives a clear signal that we must continue the fiscal consolidation and restore the budget balance in order to strengthen the country's fiscal credibility. The sovereign rating will depend largely on our ability to stick with our [fiscal consolidation] commitments," Romanian minister of finance Tanczos Barna wrote on Facebook.

Fitch forecasts a deficit of 7.5% of GDP in 2025 and 6.8% in 2026, more than double the current projected BBB median averaging 3.2% in 2025-2026. Marginal slippage from the official deficit targets (7% of GDP in 2025) would thus not directly result in the country entering the junk region.

Fiscal consolidation may face difficult trade-offs over the medium term due to its potential adverse impact on already subdued economic growth and the risk of financial market volatility pushing up interest costs, further weakening the fiscal position, the rating agency warns.

The negative outlook, assigned by Fitch to Romania's sovereign last December, "reflects the combination of significant deterioration of public finances and a marked growth slowdown in 2024 and the likely adverse effect of heightened political uncertainty on fiscal consolidation prospects," the rating agency explains.

Finance minister Tanczos Barna assured Romania would not be downgraded to the junk category this year, noting the budget plan envisaging a 7%-of-GDP public gap. 

A member of the junior ruling Hungarian party UDMR, Tanczos Barna is less prone to political interferences from the senior ruling Social Democratic (PSD) or Liberal (PNL) parties – or at least he is more likely to resign in case he comes under pressure to deviate from the fiscal consolidation ahead of the presidential elections in May. 

However, the fiscal consolidation and Romania's credibility as a debtor may come under pressure after the presidential elections, depending on the winner. 

Based on the existing potential candidates, the worst-case scenario (for the unpredictability and possibly political instability generated) would be a win for isolationist Calin Georgescu. Even if the president's activity in Romania relates to security and foreign policies, the isolationist parties would feel encouraged to put pressure on the executive, who would have to take populist measures at the cost of fiscal consolidation.

Under a second scenario, a president coming from the senior ruling partners PSD or PNL may also generate certain (lower) risks to fiscal consolidation. The critical situation has forced the ruling coalition to accept reforms in the budgetary sector and constant pressure from rating agencies and the European Commission (via the Resilience Facility disbursements and the Excessive Deficit Procedures) leaves little room for political decisions in the fiscal policy.

Even lower fiscal slippage risks and enhanced political stability would be achieved under a third scenario, envisaging a win for Bucharest mayor Nicusor Dan, followed by the reformist USR party joining the ruling coalition. This would consolidate the ruling coalition's position in parliament, where the isolationist parties hold almost a third of the seats.

iulian@romania-insider.com

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