(Bloomberg) -- Fitch Ratings signaled it may cut Romania’s credit grade, citing high political uncertainty that’s likely to delay plans to reduce the European Union’s highest budget deficit ahead of a presidential election re-run next year.
Fitch lowered the outlook on Romania’s BBB- rating, the lowest investment level, to negative from stable in an unscheduled decision late Tuesday, sending a warning to pro-European parties as they struggle to form a coalition after parliamentary elections this month.
The Black Sea nation has repeatedly increased its budget deficit to levels last seen during the pandemic, while borrowing needs have risen to a record as the economy teeters on the verge of recession.
The pro-European parties that are negotiating the new ruling alliance to stave off a resurgent far-right settled late Tuesday on a program that commits to deficit reduction. But the agreement leaves out a reformist party, which has sought concrete steps to trim the shortfall.
While the government is likely to be formed before the end of the year, the coalition’s durability is uncertain, Fitch analysts said in a statement.
“The new presidential election, likely to be scheduled for March 2025 at the earliest, will maintain high political uncertainty, and will likely also delay the implementation of fiscal consolidation measures,” they said.
Fitch said it revised up its general government deficit forecast for Romania to 7.5% of economic output next year and to 6.8% in 2026. That’s more than double the current projected median for BBB-rated economies averaging 3.2% in 2025-2026, according to the rating company.
Consolidation Plan
A now-aborted presidential vote in November plunged the country into political chaos after the surprise first-round victory of pro-Russian presidential candidate Calin Georgescu.
After security officials attributed his win to Moscow’s meddling, Romania’s top court voided the results of the vote and demanded a re-run, which is expected in March or April.
The political turmoil has been weighing on Romanian government bonds amid concerns over the budget gap. The 10-year yield jumped as much as 20 basis points — now trading up 15 at 7.41% on Wednesday, with investors demanding the widest risk premium over comparable German securities in the EU. The benchmark BET stock index fell 1.5% to the lowest since the shock court decision to annul the presidential vote.
The agreement between the current ruling Social Democrats and the Liberals, together with the ethnic Hungarians’ party and lawmakers representing the other minorities, would give the alliance a slim majority in the new parliament.
Lawmakers will convene for their first sitting on Friday with the eventual setup of the coalition still up in the air as the reformist Save Romania Union considers its next steps.
The current fiscal path that’s the focus of the pro-EU parties’ negotiations will likely push the nation’s public debt toward 62% in 2026, according to Fitch estimates, which is higher than that of other similarly-rated countries.
This could lead to a negative rating action in the future if the government fails to present a “credible fiscal consolidation plan,” Fitch said.
--With assistance from Peter Laca and Patrick Donahue.
(Updates with market reaction in 10th paragraph.)
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