“The Negative Outlook 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,” Fitch Ratings said in a statement on Friday.
“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,” Fitch said.
The ratings agency also noted that Romania’s budget deficit last year was the highest among ‘BBB’-rated sovereigns, as a result of rapid expenditure growth, including public sector salaries and unfunded pre-election pension increases. This year, the full impact of the September 2024 pension increase is expected to make budget consolidation even more challenging.
The high budget deficit last year was also accompanied by a high current account deficit (CAD) of 8.2% of GDP, with the ‘BBB’ median CAD being only 1% of GDP.
“In addition to continued import growth, the weak export performance in 2024 highlights the external competitiveness challenges of the Romanian economy reinforced by rapid nominal wage growth. Net external debt will increase from an estimated 14% in 2024 to 19% of GDP in 2026, significantly above the projected 3% for the ‘BBB’ median, from 12% in 2023,” Fitch noted.
In addition, the ratings agency projects a subdued recovery of 1.4% and 2.2% economic growth in 2025 and 2026, respectively, following an average GDP growth of 0.9% last year.
Fitch warned that a continued rapid increase in government debt over the medium term due to failure to implement measures that support sustained and credible fiscal consolidation as well as weak economic growth could lead to a rating downgrade. Evidence of adverse spill-overs to external financing and liquidity, or macroeconomic stability, stemming from high twin fiscal and CADs or domestic political shocks were also listed as factors that could cause a downgrade.
In December, the Constitutional Court annulled the presidential election process due to illegal campaigning and alleged Russian interference which propelled ultranationalist Calin Georgescu to an unexpected lead in the first round. Meanwhile, the general election held after the first round of the presidential elections resulted in a more fragmented parliament, marked by gains for far-right, anti-EU parties. Romania will hold the rescheduled presidential election on May 4, with a potential runoff to be held on May 18.
In December, Fitch revised Romania’s outlook to ‘negative’ from ‘stable’, with S&P following suit in January, signalling that they might cut their ratings for the country to junk.
Following the general election, a pro-European coalition government was formed which adopted fiscal measures to cut Romania’s budget deficit to 7% of gross domestic product (GDP) in 2025 from last year’s 8.65%. However, Fitch sees the coalition’s durability as uncertain and noted that political pressures will remain elevated, especially during the presidential campaign, which could delay additional fiscal consolidation measures until the second half of the year. The ratings agency forecasts deficits of 7.5% and 6.8% this year and the next, respectively, more than double the current projected ‘BBB’ median averaging 3.2% in 2025-2026.