December 10 (SeeNews) - The result of last week's general election in Romania points to continued political uncertainty and hence a still-challenging policy-making environment, Fitch Ratings said on Thursday.
The need to pass a 2021 budget will be a near-term test of the next administration’s cohesion and an indication of likely fiscal policy settings, Fitch Ratings said in an article published on its website.
The formation of credible medium-term fiscal-consolidation plans remains an important consideration in the agency's sovereign rating assessment given Romania's weak record, notwithstanding strong growth pre-pandemic, and high budget rigidities, Fitch noted.
In Sunday’s election, the incumbent centre-right PNL secured around 25% of the vote compared to 30% for the main opposition, the PSD, prompting prime minister Ludovic Orban to resign on Monday. The PNL is seeking to form a government via coalition talks with both the centre-right USR-PLUS Alliance and the ethnic Hungarian party UDMR, which could result in a majority government, Fitch noted.
Romanian president Klaus Iohannis, a former PNL leader, has said that centre-right groups have a large enough share of the vote to form a government and that this process should start in the coming days, it added.
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, Fitch said.
"The party has pledged to focus on improving spending efficiency and targeted revenue measures to reduce a fiscal deficit that was already rising before the coronavirus pandemic, but these may not be adequate especially if the economy’s post-pandemic recovery is weaker than expected. Even with renewed GDP growth, pursuing reforms to social entitlements looks challenging following the election result," the analysis reads.
Discussions around the 2021 budget will be the first clear indicator of the next administration’s fiscal policy settings, according to Fitch, which forecasts the general government deficit to narrow modestly to 7.1% of GDP in 2021 from a record high of 9.8% in 2020.
According to Fitch, 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 previous PNL-led government in September.
On October 30, Fitch Ratings affirmed Romania's long-term foreign and local currency issuer default ratings (IDR) at 'BBB-', with a negative outlook.
(1 euro=4.8692 lei)