October 6 (SeeNews) - The collapse of the Romanian government after less than a year in office increases the possibility of fiscal slippage and raises economic risks, Berlin-based privately-held agency Scope Ratings said on Wednesday.
Romania's parliament voted in a no-confidence motion on Tuesday to bring down the minority liberal government of prime minister Florin Citu after a period of tensions with Save Romania Union (USR), a centre-right party it established a coalition with late in 2020, Scope Ratings said in an analysis.
The no-confidence motion of opposition Social Democrats and right-wing Alliance for the Union of Romanians (AUR) was supported by ex-coalition members of USR, Scope added.
"The collapse of the Romanian government increases political uncertainties, diminishing prospects for reform and fiscal consolidation," Scope Ratings leading analyst for Romania Levon Kameryan said.
An early election could be triggered if Parliament rejects a new premier candidate twice consecutively, the rating agency noted. The largest group in opposition, Social Democrats, which promised to raise the minimum wage and increase pensions, has called for early elections in view of recent gains under opinion polling.
This, in turn, implies that rebuilding an earlier three-party coalition government, involving PNL, USR and Democratic Alliance of Hungarians in Romania (UDMR), may be the only feasible option for a majority government to avoid such elections, according to the analysis.
"The reinstitution of political stability is vital for ensuring planned fiscal consolidation continues which is important for restoring investor confidence as rising bond yields have taken their toll on primary market issuance," Kameryan added. "The lack of a governing majority could make it more difficult to pass important reforms, including those necessary for receiving critical EU funding."
According to Scope, strong growth prospects of Romania ought to provide a relevant anchor for future fiscal consolidation. The agency expects growth of around 7% in 2021, revised up sharply from 4.8% under May 2021 forecasts, before 4.5-5% in 2022, buoyed by sizeable allocations of EU monies under the Recovery and Resilience Facility. Under the facility, Romania is to receive of 14.2 billion euro in grants and 14.9 billion euro in loans, equivalent to 13.4% of 2020 GDP on aggregate.
The EU funding eases near-term liquidity bottlenecks as 13% of EU financing is expected to be immediately disbursed, following the recent endorsement of Romania’s recovery and resilience plan by the European Commission, the analysis reveals. However, in the absence of more profound fiscal reform, including significant enlargement of the tax base and higher tax compliance, the medium-run budgetary outlook remains unduly contingent upon sustained high rates of economic growth, Scope warns.
The agency stressed that credibility of authorities’ fiscal consolidation and reform agendas is a key driver underpinning Romania’s credit ratings trajectory.
"Should Romania fail to form a stable coalition government near term that implements a credible fiscal and reform programme as envisioned under the recovery plan, this could undermine growth and public finance outlooks and result in a negative rating action," Scope concluded.
Scope’s next review of Romania’s ratings is scheduled for October 22.
On May 14, Scope affirmed Romania’s long-term issuer and senior unsecured debt ratings at BBB- in both local and foreign currency and revised the outlooks to stable from negative.
(1 euro=4.9483 lei)