Managing a three- or four-party coalition could consume political energy, making it harder for the PNL to implement its agenda and constraining its appetite and capacity to enact measures to arrest the long-term weakening in Romania’s public finances.
Discussions around the 2021 budget will be the first clear indicator of the next administration’s fiscal policy settings. The PNL and USR-PLUS have both pledged to implement gradual fiscal consolidation but there is no consensus around the scope and precise timing of near-term measures given the continuing health and economic challenges from the pandemic.
Fitch forecasts the general government deficit to narrow modestly to 7.1% of GDP in 2021 from a record high of 9.8% in 2020, but risks are still predominantly on the downside.
The left-leaning, populist PSD, which will remain the largest party in parliament, may be able to build an effective opposition bloc and hinder policymaking.
However, Fitch does not anticipate disruptive fiscal initiatives to emerge from the new parliament, such as the 40% increase in pensions that was scaled-down by the PNL government in September.
Romania’s political volatility in recent years has increased policy uncertainty and undermined medium-term fiscal planning. The formation of credible medium-term fiscal-consolidation plans remains an important consideration in Fitch’s sovereign rating assessment given the country’s weak record (notwithstanding strong growth pre-pandemic) and high budget rigidities.
Fitch currently rates Romania at ‘BBB-‘ with a negative outlook, the lowest investment grade rating.