(Bloomberg) -- Romania should take rapid measures to limit the surge in a budget deficit that’s become the largest in the European Union to avoid losing its investment-grade score, according to analysts at Fitch Ratings.
The Black Sea nation, which has the lowest investment grade from all three major rating companies, may need to freeze spending and raise revenue to narrow the deficit to within the EU’s benchmark of 3% of gross domestic product from 2027, Fitch analysts Federico Barriga Salazar and Gergely Kiss said in a report Tuesday.
The budget shortfall is on course to recede to 5.8% of GDP from an estimated 7% this year without a significant effort on fiscal restraint, Fitch said. The slower course would trigger an increase in public debt toward 80% of GDP in 2037, a level “very high for Romania” that would exceed the average of nations with a similar rating.
“Negative rating pressure could increase, especially if there is an adverse spill-over to policy credibility stemming from the fiscal weakness,” Salazar and Kiss said, adding that Romania may need more than four years to bring public debt in line.
Romania’s government has struggled to rein in debt that exceeded 50% of output this year, with spending on programs including pension hikes. Weeks ahead of presidential and parliamentary elections from Nov. 24, both main parties — which form a joint coalition governing in Bucharest — have leaned into expanded pensions in the nation of 19 million.
The country, which has been under the EU’s excessive deficit procedure since before the pandemic, has asked the European Commission to allow a seven-year period, starting from 2024, for narrowing the gap toward the 3% limit, but has yet to present a clear plan for reaching that objective.
Faced with the risk a wider-than-expected deficit this year, the coalition has taken some steps to limit spending and grant an amnesty for citizens to pay overdue taxes. More changes are expected after the election.
This story was produced with the assistance of Bloomberg Automation.
--With assistance from Irina Vilcu.
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