International rating agency Moody's followed Fitch and S&P in changing Romania's outlook from stable to negative, based on concerns about the fiscal situation aggravated by the political turmoil. All three major agencies rate Romania's debt at the lowest category in the investment-grade area – Baa3 in the case of Moody's.

The decision to change the outlook to negative reflects the risk that in the absence of the adoption of additional fiscal consolidation measures, Romania's fiscal strength will significantly weaken in coming years, the rating agency explained. Moody's expects Romania's debt-to-GDP ratio to exceed the 60% threshold during 2026.

If the government's debt burden and debt affordability metrics were to weaken materially less than Moody's current expectations, the rating agency says it would likely return Romania's outlook to stable. However, this would most likely require adopting additional fiscal consolidation measures and improving spending discipline and overall fiscal policy management. 

Romanian finance minister Tanczos Barna said no additional consolidation measures are needed in order to meet the 7.0%-of-GDP deficit target this year. However, the statement must be put in the electoral context, with the country expecting presidential elections in May. 

The European Commission gave its green light to Romania's fiscal consolidation plan last November in the European Semester report when it said it expected Romania to draft and enact specific tax reforms by April 1. Ad-hoc consolidation measures were enacted at the end of 2024, but they are broadly seen as insufficient, and anyway, there is no consensus on further steps needed for the 7-year period.

Romania has to prepare a report, building on the World Bank report on taxation prepared under the National Recovery and Resilience Plan (PNRR), milestone 205, establishing two scenarios for the tax reform, with fully specified measures by April 1, according to the set of reforms and investments that underpins an extension of the adjustment period to seven years for Romania, endorsed by the European Commission on November 26. Measures should cover all areas of taxation and social contributions.

Moody's expects delayed additional fiscal consolidation measures, unlikely to be announced before the presidential ballot, to result in moderate fiscal consolidation to a 7.7%-of-GDP public deficit in 2025 – still nearly 1.0 percentage points less compared to 2024. 

Coupled with a significant downward revision of Moody's growth projections for Romania, the still wide public deficit would rapidly drive the government debt burden higher to 59.3% of GDP at the end of 2025 and to 62.7% at the end of 2026, from 48.9% at the end of 2023.

The public indebtedness trajectory expected by Moody's diverges significantly from the government's more optimistic expectations included in the 7-year fiscal consolidation plan drafted last year under the Excessive Deficit Procedure. Thus, the government expected at that time the debt-to-GDP ratio at only 52.2% at the end of 2024 (compared to 54.6% realized), 55.7% at the end of 2025, and 58.5% at the end of 2026.

iulian@romania-insider.com

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