Fitch Ratings has established Romania's long-term foreign currency rating at "BBB minus," but has worsened the outlook from stable to negative, which means that a new downgrade is possible, according to a press release of the financial rating agency.
The next review by Fitch for Romania's rating was scheduled for February 2025, but the agency believes that recent developments in the country justify such a deviation from the calendar.
The outlook revision reflects political uncertainties, which affect the fiscal outlook, a more divided Parliament, the increase in public debt and the high budget deficit, the press release reads. According to Fitch, political uncertainties have reached a high level and the agency's assessment is that they are likely to have a significant adverse effect on fiscal consolidation.
The parliamentary elections resulted in a more divided Parliament, with a rise in far-right, anti-EU parties, reflecting the increasing polarization of Romanian society. A new four-party pro-European governing coalition is likely to be formed before the end of 2024. However, the durability of such a coalition is uncertain, and new presidential elections, likely scheduled for March 2025 at the earliest, will keep political uncertainties high, and likely delay the implementation of fiscal consolidation measures, according to Fitch.
The agency estimates that Romania's general government deficit will rise to 8.2% of GDP in 2024, above Fitch's August estimate of 7.2% of GDP, above the government's previous target (5% of GDP) and 6.5% of GDP in fiscal 2023. The larger-than-expected fiscal deterioration mainly reflects the rapid increase in spending, including unfunded public sector wage increases and pre-election pensions. The full annual impact of the September 2024 pension increase will add to fiscal pressures next year, making future consolidation even more challenging, the press release says.
While Fitch expects fiscal consolidation to begin next year, the agency revised its estimate for Romania's general government deficit to 7.5% of GDP in 2025 and 6.8% in 2026, more than double the average for "BBB" countries of 3.2% of GDP in 2025-2026. In Fitch's view, fiscal consolidation is likely to face difficult trade-offs due to the potential adverse impact of already subdued economic growth and the risk that market volatility could lead to higher interest costs, further weakening the fiscal position.
The higher fiscal deficit will lead to a rapid increase in public debt as a percentage of GDP over the medium term. Fitch forecasts a steeper increase in the debt trajectory compared to previous years, as primary deficits remain high and nominal growth slows significantly. In the agency's baseline scenario, general government debt as a percentage of GDP will increase from 49% in 2023 to 62% in 2026, above the average for "BBB" countries of 56%, and will continue to increase significantly, to around 70%, by 2028.
The current account deficit (CAD) is expected to reach 8% of GDP in 2024, from 7.3% of GDP in 2023, while the average for "BBB" countries is only 1% of GDP, making Romania an exceptional case. The weak export performance in 2024 highlights the challenges related to the external competitiveness of the Romanian economy. Net external debt will increase from 12% of GDP in 2023 to 20% of GDP in 2026, above the average for countries with a "BBB" rating of 3% of GDP.
Among the factors that, in Fitch's opinion, could lead to a downgrade of the rating are the continued rapid increase in government debt over the medium term, amid the failure to implement measures that support credible and sustained fiscal consolidation, or weak economic growth, and negative effects on macroeconomic stability, due to political shocks.
Among the factors that, in Fitch's opinion, could lead to an improvement in the rating, there is a greater than projected fiscal consolidation, which would support the stabilization of the debt level as a percentage of GDP over the medium term, the reduction of the degree of external indebtedness and the risks to external financing, following the structural improvement of the current current account situation.