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Policy implications of likely early Romanian elections unclear - Fitch

Policy implications of likely early Romanian elections unclear - Fitch Fitch Ratings Romania

BUCHAREST (Romania), February 7 (SeeNews) - The fall of Romania's liberal government underscores how political volatility has complicated policymaking at a time when fiscal and external metrics have worsened, Fitch Ratings said on Friday.

It is unclear whether possible early elections would result in greater clarity on policy steps to address the recent deterioration, Fitch Ratings said in a press release.

Prime minister Ludovic Orban's centre-right PNL government lost a parliamentary no-confidence vote on Wednesday brought by the main opposition party, the centre-left PSD, and the ethnic Hungarian party UDMR. The PNL administration took office last November after the PSD-led government lost a no confidence vote.

"The near-term political trajectory is uncertain. President Iohannis has proposed that Orban form the next government, but this would require a vote of confidence passing. The PSD's stance is uncertain, but if two attempts to pass a confidence vote fail, early elections can be called. We think this is now the most likely option," Fitch said.

The rating agency recalls that Romania has had four prime ministers in the last two years, partly due to corruption scandals.

According to Fitch, the outgoing PNL government has outlined a plan to lower the deficit from a preliminary 3.8% in 2019 to 3.6% in 2020 and to 2.8% of GDP by 2022. "However, we believe its 2020 budget was based on optimistic growth and revenue assumptions, and concrete proposals to address the fiscal impact of large pension increases legislated for 2020 and 2021 have yet to be set out."

A narrowing of the fiscal deficit would also help address the widening current account deficit and macro-economic overheating risks, Fitch stressed.

"Conversely, policy paralysis until elections are held and post-election parliamentary fragmentation would increase downside risks, in particular if pensions rise in September without offsetting measures. Reduced confidence in policymakers' ability to avoid higher-than-projected fiscal deficits, or adverse policy actions that led to a rapid increase in government deficits and debt/GDP, could lead to a negative rating action," Fitch concluded.

Fitch's next scheduled sovereign review is due on May 1.

In November, Fitch Ratings said it has affirmed Romania's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with stable outlooks.

(1 euro=4.7642 lei)