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Moody's adjusts Romania's rating outlook to pessimistic.

Major credit rating agency Moody's mirrors Fitch and S&P in revising Romania's assessment from stable to negative, attributed to worries regarding the nation's fiscal predicament exacerbated by the political chaos. Presently, all three significant rating entities categorize Romania's debt as...

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Major credit rating agency Moody's aligns with Fitch and S&P, shifting Romania's forecast from...
Major credit rating agency Moody's aligns with Fitch and S&P, shifting Romania's forecast from stable to negative. This decision stems from worries about the country's fiscal status, which has been further complicated by political upheaval. At present, the debt of Romania is categorized in the lowest rung of the investment-grade spectrum by all three agencies.

Moody's adjusts Romania's rating outlook to pessimistic.

Updated Report: Romania's Fiscal Woes and the Path Toward Recovery

The international rating agency, Moody's, has followed suit with Fitch and S&P, updating Romania's outlook from stable to negative, citing concerns about the nation's turbulent politics and strained fiscal situation. All three agencies classify Romania's debt within the lowest investment-grade tier, with Moody's assigning it a Baa3 rating.

The fresh outlook reflects Moody's concerns that without additional consolidation measures, Romania's financial strength could weaken considerably over the coming years. The agency predicts Romania's debt-to-GDP ratio to surpass the 60% threshold during 2026.

Should Romania's government debt burden and affordability metrics improve significantly beyond Moody's current projections, the agency states it may revert Romania's outlook back to stable; however, this would likely necessitate additional fiscal austerity measures, improved spending discipline, and stellar fiscal policy management.

Finance Minister Tanczos Barna contends that no additional consolidation measures are required this year to meet the 7.0%-of-GDP deficit target. Yet, it's essential to consider this statement within the context of the upcoming May presidential elections.

In November 2021, the European Commission endorsed Romania's fiscal consolidation plan, anticipating that Romania would draft and enact tax reforms by April 1, 2022. Ad-hoc measures were enacted at the end of 2024, but many view these as insufficient. A consensus on the steps necessary for the seven-year period remains elusive.

Romania must compile a report, focusing on tax reforms under the National Recovery and Resilience Plan (PNRR), by April 1, 2022. This report must outline two scenarios for tax reform, with complete measures specified, and cover all areas of taxation and social contributions.

According to Moody's expectations, delayed additional fiscal consolidation measures are unlikely to be announced before the presidential vote in May. Consequently, the agency foresees only moderate fiscal consolidation, resulting in a 7.7%-of-GDP public deficit in 2025—nearly 1.0 percentage points less than 2024.

Tied with a significant reduction of Moody's growth projections for Romania, the persistently large public deficit would push the government debt burden towards 59.3% of GDP by the end of 2025 and 62.7% by the end of 2026, up from 48.9% at the close of 2023.

The debt trajectory projected by Moody's diverges significantly from the government's more optimistic projections included in the seven-year fiscal consolidation plan from 2021. Thus, the government expected the debt-to-GDP ratio at only 52.2% at the conclusion of 2024 and 55.7% by the end of 2025, with 58.5% projected for 2026.

To adapt to these challenges and avoid further credit downgrades, Romania should consider various fiscal measures:

  1. Leveraging Expenditure Reductions: Focusing on reducing public spending by identifying and eliminating excessive spending, although challenging due to public finances' complexity.
  2. VAT Adjustments: Possible VAT rate increases could serve as a last-resort measure for austerity if other measures fall short.
  3. Corporate Taxation: Preventing any increase in corporate taxation may hinder government revenue collection efforts due to employers' associations' efforts.
  4. Stable Government: Establishing a stable government is crucial, as President Nicușor Dan anticipates a new government by mid-June, paving the way for fiscal reforms.
  5. EU Funds & Investment: Accelerating investment supported by EU funds can foster economic growth and indirectly support fiscal stability.

Balancing spending reductions and potential tax increases, along with structural reforms aimed at improving economic efficiency and stability, will be crucial for Romania to address fiscal concerns and avoid credit rating downgrades.

  1. The concerns about Romania's turbulent politics and strained fiscal situation, as mentioned by Moody's, are also shared by other financial institutions, making it a matter of general news in the business and finance sector.
  2. The path towards Romania's recovery, as stated in the updated report, seems to rely heavily on a combination of fiscal austerity measures, improved spending discipline, and effective fiscal policy management, which might have implications for the country's political landscape.

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