Sursa foto: Fitch
Fitch rating agency, whose ratings are taken into account by financial markets on which Romania borrows, says in a statement that the break-up of the coalition government could hamper fiscal consolidation efforts. Fiscal consolidation and reducing the budget deficit are key to solving the problems posed by Fitch’s negative outlook on the country’s BBB- rating.
Fitch points out that tensions between the PNL and USR PLUS have grown over public policy priorities – the Anghel Saligny program – but also over delays in judicial reform.
The rating agency also forecasts that President Iohannis will also appoint Florin Cîțu as prime minister if he fails the no-confidence motion, to lead a minority government, as in 2019-2020.
“It is unclear how a minority PNL government or a new PSD government will be able or willing to make sensible reforms in areas such as health, public salaries, pensions, and justice,” Fitch says.
A positive country rating decision and conditional on confidence that the authorities will implement credible fiscal plans that stabilize the ratio of government debt to Gross Domestic Product (GDP) in the medium term, Fitch says.
The rating agency warns that “lack of progress in implementing reforms, which would lead to a faster-than-expected increase in public debt, could result in a negative country rating decision”.
Fitch’s next rating review is scheduled for 22 October.
Full Fitch press release:
Fitch Ratings-London-07 September 2021: The collapse of Romania’s coalition government could disrupt fiscal consolidation efforts that are key to resolving Romania’s ‘BBB-‘ Negative Outlook, says Fitch Ratings. Sustained economic growth and EU Next Generation funding still offer a potential path to deficit reduction, but the outlook for addressing long-standing fiscal rigidities could deteriorate.
Tensions between PNL and USR-Plus, the two centre-right parties in the coalition that took over government in late 2020, have grown in recent weeks over policy priorities, including the scope of a regional investment scheme and delays in judicial reforms. USR-Plus announced on 7 September that it was leaving the coalition alliance, following the resignation of USR-Plus MEP Stelian Ion as justice minister on 2 September. This leaves the government without a parliamentary majority.
USR-Plus tabled a no-confidence motion to pressure the PNL to replace Florian Catu as prime minister – which the PNL refused. USR-Plus received support from the right-wing AUR party to move the no-confidence motion, with the centre-left opposition PSD initially signalling tacit support. These parties would have enough votes to pass the motion, which would force the president to appoint a new prime minister to form a government. President Iohannis, a former member of the PNL, would likely reappoint Catu, who would try to form a minority PNL government, as in 2019-2020.
Two failed attempts to form a government would trigger early elections. Recent polls put the PSD in a strong position to form the next government if elections were held. This could put pressure on the other parties to compromise to retain power.
The coalition’s ambitious reform agenda, anchored in the National Recovery and Resilience Plan (NRP), has already faced increasing obstacles due to difficulties in implementing measures during the pandemic. It is unclear to what extent a minority NLP-led government or a new PSD-led government would be able or willing to push through politically sensitive reforms in health, wages, pensions and the judiciary. This could further delay the European Commission’s approval of the NRDP, which the government originally expected by the end of September.
Political turmoil is also affecting the fiscal outlook. The government had planned ambitious spending and revenue reforms to reduce the deficit to below 3% of GDP in 2024, from 9.3% of GDP in 2020. The government had expected to propose a unitary wage and pension law by the end of 2021, and had pledged to increase tax compliance to reduce the large VAT revenue deficit. But little progress has been made in recent months, and now the prospects for rapid implementation have dimmed further, although the NRDP could still serve as a political anchor. Failure to respect the projected deficit reduction path is the main risk to Fitch’s debt projections.
EU financing of commitments under the PNRR will reduce pressure on the budget and, combined with favourable economic growth prospects, support deficit reduction through revenue overperformance (as was the case before 2020). However, in the absence of 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 over 12 months in June. Failure to moderate the budget deficit or attract non-debt-creating inflows (mainly EU funds) could undermine macroeconomic stability.
Fitch has consistently stated that the evolution of public finances is the main factor determining Romania’s rating. A positive rating action would require confidence that the authorities will implement credible fiscal plans that stabilise overall public debt/GDP in the medium term. Lack of progress in implementing reforms leading to faster than projected growth in public debt could lead to a negative rating action. Fitch’s next scheduled review of Romania’s rating will take place on 22 October.