Prolonged political crisis in Romania undermines fiscal consolidation outlook, says Fitch

Romania is running out of time in its attempt to prevent its sovereign rating from slipping out of the investment-grade region, as the prolonged political crisis puts the country's fiscal credibility at risk, Fitch Ratings, cited by Bloomberg, warned.

The agency will review Romania's rating in January 2027, and by then the government will need to demonstrate that it can continue reducing the deficit and present a credible fiscal plan.

In the meantime, S&P is expected to review Romania's rating on October 2, with its expert team due in Bucharest this week.

Romania needs an additional fiscal adjustment of about 1.5% of GDP to help stabilize the growth of public debt over the medium term, said Malgorzata Krzywicka, a Fitch analyst, in an interview with Bloomberg.

The statement needs, however, to be put into context: the 1.5%-of-GDP adjustment is a medium-term requirement and does not necessarily have to be delivered in 2027.

Drafting the 2027 budget and presenting a credible trajectory towards achieving a 3% of GDP deficit are essential to avoiding a rating downgrade, she said. The Fitch analyst warns that the room for maneuver on the spending side is already limited, after the austerity measures applied, and points to improving tax collection as one of the important ways to reduce the deficit.

Krzywicka rejected arguments that stimulating economic growth could replace fiscal consolidation.

"These are marginal gains. They are nowhere near the scale of the adjustment that Romania needs to make. Stronger economic growth, alone, will not solve the problem of large deficits," she said.

Stronger economic growth, alone, will not solve the problem of large deficits

Krzywicka described the broader market reaction to the current crisis as "relatively benign", explaining that this is partly due to the good deficit performance this year and the inflow of European funds. These provide a protection mechanism that has allowed Romania to continue to finance itself from the markets even under pressure, the Fitch analyst also said.

Fitch affirmed Romania's BBB- sovereign rating, the lowest investment-grade level, with a negative outlook at the end of July. Since then, attempts to install a new prime minister backed by a stable parliamentary majority have failed, prolonging the political crisis and raising the prospect of early elections.

Romania's ESA budget deficit is expected to reach 6.4% of GDP this year, 5.7% of GDP in 2027 and 5.0% of GDP in 2028 under the seven-year fiscal consolidation plan approved by the European Commission. Under the 2026 budget, the Romanian government envisaged a 6.0% of GDP ESA deficit, followed by gradually declining gaps of 5.2% in 2027, 4.2% in 2028 and 3.2% in 2029. The 6.4%-5.7%-5.0% trajectory reflects the medium-term fiscal framework, rather than Fitch's current forecast.

In its end-July update, Fitch forecast Romania's general government deficit at 5.9% of GDP in 2026, below the government's target of 6.2%, reflecting better year-to-date budget execution and an expected increase in capital expenditure in the second half of the year.

Therefore, fiscal consolidation in 2027 may be softer than in 2026, and particularly than in 2025, but the pressure is likely to rise again in 2028 ahead of the parliamentary elections expected late in the autumn.

In line with the fiscal calendar envisaged under the Excessive Deficit Procedure and Romania's national plans, the consolidation path provides a framework against which Fitch can assess further fiscal and rating developments.

“We expect deficit reduction to be slower beyond 2026, with significant downside risks ahead of 2028 parliamentary elections, given Romania's record of pre-election easing, weak growth, limited space for additional fiscal consolidation measures due to high socio-economic costs and continued political uncertainty,” Fitch said in July.

“We forecast the fiscal deficit will gradually narrow to 5% in 2028, assuming lower capex, following the RRF completion, and modest re-indexation of pensions and wages,” the agency said.