Loading page...

Romanian Business News - ACTMedia :: Services|About us|Contact|RSS RSS

Subscribe|Login

Fitch: Romania Election Does Not Allay Medium-Term Fiscal Uncertainty

201214104436338740.jpg

Fitch Ratings-London-10 December 2020: Romania’s general election result points to continued political uncertainty and hence a still-challenging policy-making environment, says Fitch Ratings. The need to pass a 2021 budget will be a near-term test of the next administration’s cohesion and an indication of likely fiscal policy settings.

In Sunday’s election, the incumbent centre-right PNL secured around 25% of the vote compared to 30% for the main opposition, the PSD, prompting Prime Minister Ludovic Orban to resign on Monday. The PNL is seeking to form a government via coalition talks with both the centre-right USR-PLUS Alliance and the ethnic Hungarian party UDMR, which could result in a majority government. Romanian President Klaus Iohannis, a former PNL leader, has said that centre-right groups have a large enough share of the vote to form a government and that this process should start in the coming days.

Opinion polls had pointed to a stronger performance by the PNL, albeit within a relatively fragmented parliament. Managing a three- or four-party coalition could consume political energy, making it harder for the PNL to implement its agenda and constraining its appetite and capacity to enact measures to arrest the long-term weakening in Romania’s public finances. The party has pledged to focus on improving spending efficiency and targeted revenue measures to reduce a fiscal deficit that was already rising before the coronavirus pandemic, but these may not be adequate especially if the economy’s post-pandemic recovery is weaker than expected. Even with renewed GDP growth, pursuing reforms to social entitlements looks challenging following the election result.

Discussions around the 2021 budget will be the first clear indicator of the next administration’s fiscal policy settings. The PNL and USR-PLUS have both pledged to implement gradual fiscal consolidation but there is no consensus around the scope and precise timing of near-term measures given the continuing health and economic challenges from the pandemic. Fitch forecasts the general government deficit to narrow modestly to 7.1% of GDP in 2021 from a record high of 9.8% in 2020, but risks are still predominantly on the downside.

The left-leaning, populist PSD, which will remain the largest party in parliament, may be able to build an effective opposition bloc and hinder policymaking. However, Fitch does not anticipate disruptive fiscal initiatives to emerge from the new parliament, such as the 40% increase in pensions that was scaled-down by the previous PNL-led government in September.

Romania’s political volatility in recent years has increased policy uncertainty and undermined medium-term fiscal planning. The formation of credible medium-term fiscal-consolidation plans remains an important consideration in our sovereign rating assessment given the country’s weak record (notwithstanding strong growth pre-pandemic) and high budget rigidities.

More