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Romania's political crisis poses risk to budget deficit reduction - Fitch

Romania's political crisis poses risk to budget deficit reduction - Fitch Fitch Ratings Romania

BUCHAREST (Romania), September 8 (SeeNews) - The collapse of Romania’s coalition government could disrupt fiscal consolidation efforts, which are key to resolving the negative outlook on Romania’s ‘BBB-’ rating, Fitch Ratings said.

Buoyant economic growth and Next Generation EU funding still provide a potential path to deficit reduction, but prospects for tackling long-standing fiscal rigidities could deteriorate, Fitch said in an article published on its website on Tuesday.

The ratings agency notes that tensions between the PNL and USR-Plus, two centre-right parties in the coalition that took office in late 2020, have risen in recent weeks over policy priorities, including the scope of a regional investment scheme and delays to judicial reforms.

USR-Plus said last week that they were leaving the coalition alliance, following the dismissal of USR-Plus MP Stelian Ion as justice minister.

Two failed attempts to form a government would trigger early elections, and recent polls put the PSD in a strong position to form the next government were elections to take place. In Fitch's opinion, this could pressure the other parties to compromise in order to retain power.

The coalition’s ambitious reform agenda, anchored in the national recovery and resilience plan (NRRP), already faced mounting obstacles due to difficulty implementing measures during the pandemic, the analysis reveals.

"It is uncertain how far a minority PNL-led government or a new PSD-led government would be able or willing to push through politically sensitive reforms to healthcare, wages, pensions and the judiciary. This could further delay European Commission approval of the NRRP, which the government initially expected by end-September," Fitch also said.

Political turmoil also clouds the fiscal outlook, Fitch added, as the government had planned ambitious expenditure and revenue reforms to reduce the deficit to under 3% of GDP in 2024 from 9.3% of GDP in 2020. Also, the government had expected to propose a unitary wage and a pension bill by end-2021 and had pledged to increase tax compliance to reduce a large VAT revenue gap.

"But little progress has been made in recent months and now the prospects of rapid implementation have diminished further, although the NRRP could still serve as a policy anchor. Failure to follow the envisaged deficit-reduction path is the main risk to Fitch’s debt projections."

EU funding of commitments under the NRRP will take some pressure off the budget, and, combined with buoyant growth prospects, will underpin deficit reduction through revenue overperformance, but without deeper reform, long-standing fiscal challenges – including a very rigid expenditure profile – and broader fiscal and external risks will persist.

The current account deficit was 6.3% of GDP on a 12-month rolling basis in June. Failure to moderate the fiscal deficit or attract non-debt-creating inflows (mainly EU Funds) could undermine macroeconomic stability, the ratings agency noted.

Fitch has consistently stated that the evolution of public finances is the main driver of Romania’s rating.

"Positive rating action would require confidence that the authorities will implement credible fiscal plans that stabilise general government debt/GDP over the medium term. Lack of progress in implementing reforms, leading to a faster-than-projected increase in public debt, could lead to negative rating action," Fitch concluded.

Fitch’s next scheduled review of Romania’s rating is due on October 22.

(1 euro=4.9488 lei)