Markets anticipate swift Romanian government formation and reliable fiscal strategy implementation
In the wake of Nicușor Dan's election as Bucharest mayor and potential Romania president, the looming formation of a new government is seen as a critical step to manage fiscal risks. According to S&P Global Ratings, the focus will be on the swiftness of the government's formation and the credibility of its fiscal consolidation plans.
S&P emphasized the importance of managing Romania's budget and current account deficits in a climate of policy fragmentation and slow economic growth. The country has historically relied on capital inflows, including Eurobonds, EU funds, and foreign investment, to finance its high deficits, but potential delays in policy response could jeopardize these financing sources.
S&P warned that it might reduce Romania's credit score if deficits expand more than expected over the medium term due to political actions and slower economic growth. This could exacerbate public debt and interest burdens while straining Romania's sizable current account deficits.
The warning follows S&P's earlier caution that Romania could lose its investment grade if political turmoil persists, with the country's prospects appearing riskier than the negative outlook on its BBB- sovereign rating suggests.
Regardless of Romania's presidential election outcome, policymaking is anticipated to become more fragmented, unstable, and ineffective over the next few months, according to S&P Global. In January, the agency changed the outlook on Romania's sovereign rating to negative, and removing the country's debt from the investment-grade category hinges on a second fiscal corrective package after the 2024 ESA public deficit was disclosed at 9.3% of GDP.
Dan, a moderate reformist favoring a clear path toward fiscal stability, aims to present a fiscal consolidation plan targeting a reduction of Romania’s public deficit to align with EU fiscal rules. Raising the VAT rate is not considered a preferred option, with the focus instead on expenditure restraint or other revenue-side measures. The plan aims to reduce the fiscal deficit toward 2.5% of GDP by 2031, starting from the high deficit of 9.3% of GDP in 2024.
The credible and timely implementation of a fiscal consolidation plan is vital to maintaining investor confidence and averting further downgrades, according to S&P and other rating agencies. A continued fiscal shortfall or policy uncertainty would increase borrowing costs and impede economic stability. The acceptable 7.5% deficit gap Dan aims for could stabilize Romania's credit profile if achieved, indicating improved fiscal discipline compared to a "no-policy-change" scenario.
In light of the anticipated political fragmentation and potential ineffectiveness of policymaking, the formation of a new government in Romania might have significant implications for the business, finance, and general-news sectors. Specifically, the credibility and swiftness of the government's fiscal consolidation plans will be closely scrutinized by rating agencies like S&P Global, as they may impact Romania's ability to secure financing for its high budget and current account deficits.
