Fitch Ratings announces a moderate assessment of Romania's forthcoming fiscal plan, a month prior to the scheduled country update.
Romania's Fiscal Consolidation Package: A Necessary Step Towards Fiscal Stability
Romania's fiscal consolidation package, designed to address the country's large budget deficit and improve long-term fiscal sustainability, is a critical effort that has garnered both domestic and international attention. The package, targeting a roughly 5% of GDP adjustment through a mixture of tax increases and spending cuts, is seen as a necessary step towards stabilizing public finances by both Fitch and Moody's.
Fitch, a leading rating agency, has highlighted the significant impact of the package on economic growth. While the implementation risks are present, the package has helped revive market confidence, as demonstrated by successful bond issuances and lowered yields from recent peaks. However, Fitch estimates the fiscal tightening impact at about 0.6% of GDP in 2025 and 3.45% in 2026, implying a substantial near-term drag on growth.
Moody's, another prominent rating agency, shares a positive view of the consolidation package. The agency welcomes it as a step towards stabilizing public finances but emphasizes that ongoing successful implementation, particularly in generating supplementary revenues and advancing structural reforms, is critical for achieving long-term fiscal sustainability. The second phase of reforms under Prime Minister Ilie Bolojan is identified as key to sustaining fiscal consolidation efforts.
Economic growth is expected to slow markedly as a direct consequence of the consolidation. ING, a leading financial services company, predicts that Romania might see GDP growth stagnate around 0.3% in 2025 due to reduced consumer demand following VAT hikes and other tax increases, with inflation potentially rising to 8% temporarily because of these demand shocks.
The fiscal package has also gained EU support, which is conditional on Romania meeting deficit reduction targets to unlock access to €60 billion in recovery funds, cushioning some negative economic impacts. However, rating agency S&P remains cautious, maintaining a negative outlook on Romania’s BBB- rating due to ongoing fiscal risks and warning that failure to sustain consolidation could lead to downgrade and higher borrowing costs.
In summary, Fitch and Moody’s evaluations converge on the view that Romania’s fiscal package is essential for restoring fiscal stability but will cause near-term economic growth to slow significantly. Long-term fiscal sustainability depends heavily on the successful implementation of the package and complementary structural reforms, with market confidence responding favorably but fragile to current developments. The government's estimated budgetary impact for this year is 1.1% of GDP, according to Fitch, with an estimated RON 10.7 billion (EUR 2.1 billion) impact, mostly on revenues. The estimated budgetary impact for 2026 is 3.5% of GDP, according to Fitch, with a total estimated RON 92.6 billion (EUR 18 billion) impact, balanced between revenues and expenditures. More than half the envisaged additional revenue this year comes from the VAT rate hike, according to Fitch. The rating agency Fitch explains that the VAT rate hike will have a significant impact on the economy. Fitch warns that significant fiscal consolidation will weigh on economic growth and that the higher inflation will further erode real incomes. Moody's warns that successful implementation and structural reforms are critical for long-term fiscal sustainability in Romania. The second package of reforms, already outlined by prime minister Ilie Bolojan, is key to support long-term fiscal consolidation in Romania, according to Moody's. Fitch highlights concerns about the potential impact of the VAT rate and fiscal stimulus withdrawal on consumption, hence tax revenues and economic growth. The implementation risks of the fiscal package cannot be discounted, according to Fitch. The Fiscal Council's estimate of the budgetary impact is different from the government's estimate provided by Fitch. The yields in Romania remain above the levels seen until mid-November 2024, Fitch notes. The government bond yields in Romania had dropped from their recent highs in early May, according to Fitch. Fitch notes a revived market confidence following the successful FX bond issues after the launch of the fiscal package in Romania.
Finance experts Fitch and Moody's agree that Romania's fiscal consolidation package, aimed at improving fiscal stability, will have a significant impact on economic growth, likely causing a slowdown. Long-term fiscal sustainability relies on successful implementation and the execution of complementary structural reforms, as highlighted by Moody's, with the second phase of reforms led by Prime Minister Ilie Bolojan being key to this process. The VAT rate hike within the package, contributing significantly to the projected additional revenue, is of concern for both agencies, as it may negatively affect consumer demand, tax revenues, and economic growth, while potentially pushing inflation up to 8%.
