Political risks have eased in Romania since the previous government introduced a consolidation package in late 2024 amid heightened tensions triggered by the annulment of November’s presidential election and the coalition negotiations resulted in ambitious consolidation targets, but significant fiscal consolidation will weigh on economic growth, and implementation risks cannot be discounted, according to a balance evaluation of the first fiscal package issued by rating agency Fitch one month before the country review expected on August 15.
Fitch also notes the market’s revived confidence seen in the successful FX bond issues after the launch of the fiscal package. Government bond yields had dropped from their recent highs in early May when nationalist George Simion won the first round of the presidential elections, the rating agency notes, stressing that the yields remain above the levels seen until mid-November 2024.
The comment comes in line with the increasing concerns about the impact the VAT rate and fiscal stimulus withdrawal could have on consumption, hence tax revenues and economic growth.
On what may seem a slightly more optimistic note, Moody’s welcomed Romania’s fiscal package as a step towards stabilising public finances, warning at the same time that successful implementation (in terms of supplementary revenues derived) and structural reforms remain critical for long-term fiscal sustainability. The second package of reforms, already outlined by prime minister Ilie Bolojan, emerges as key to support long-term fiscal consolidation.
The government estimates that its budgetary impact will be 1.1% of GDP this year and 3.5% in 2026, according to an evaluation published by Fitch on July 14, which reads on a neutral note.
In fact, the government estimated the impact of the fiscal package at RON 10.7 billion (EUR 2.1 billion, mostly on revenues ) or 0.56% of GDP this year and RON 92.6 billion (EUR 18 billion, 4.6% of GDP, balanced between revenues and expenditures) next year. The Fiscal Council estimates the impact at 0.6% of GDP this year and 3.45% of GDP in 2026.
Significant fiscal consolidation will weigh on economic growth, and implementation risks cannot be discounted, warns Fitch. More than half the envisaged additional revenue this year comes from the VAT rate hike, and this will generate higher inflation, which will further erode real incomes, the rating agency explains.
iulian@romania-insider.com
(Photo source: Erik Lattwein/Dreamstime.com)
Leave a Reply