Romanian authorities engage in discussions with Fitch regarding impending credit rating evaluation
In Bucharest, on June 25, Romanian Prime Minister Ilie Bolojan met with representatives from Fitch Ratings to discuss the country's fiscal correction plan. The meeting, which also included Deputy Prime Minister Tánczos Barna, Finance Minister Alexandru Nazare, and Mihai Jurca, the designated head of the prime minister's Chancellery, took place ahead of Fitch Ratings' upcoming assessment of Romania's fiscal and economic outlook.
The discussion focused on measures that can improve financial indicators and strengthen investor confidence in the Romanian economy. These measures are crucial, as Romania's budget deficit reached a staggering 9.3% of GDP in 2024, putting the country under pressure from the European Commission through the Excessive Deficit Procedure (EDP).
The government's fiscal correction plan, as outlined in the 2025-2028 Ruling Programme, includes a multi-year strategy involving expenditure controls, tax policy adjustments, and administrative reforms. Key details of this plan are still under discussion with European Commission experts.
The plan aims to modernize state institutions and restore fiscal discipline. It includes setting deficit reduction targets, capping expenditure shares, and implementing quarterly reporting on performance indicators from 2025 to 2030. The government also plans to develop a national strategy for fiscal sustainability during this period.
Fiscal measures announced as part of the plan include reorganizing Value Added Tax (VAT) into two rates (11% and 21%), increasing excise duties by 10% on alcohol, fuel, and tobacco, capping public sector pensions and salaries in 2026, increasing the teaching schedule, raising contributions to the National Health Insurance Fund for pensions above a threshold by 10%, taxing bank profits, and imposing a surcharge on gambling. The tax on dividends is planned to increase from 10% to 16% starting January 1, 2026.
The European Commission's recommendations require Romania to submit its updated fiscal consolidation trajectory by July 8, 2025, and thereafter bi-annual updates under the Excessive Deficit Procedure. The Commission has set October 15 as the deadline for the annual update on the deficit.
The fiscal consolidation trajectory demands substantial fiscal effort, which Romania may find challenging to achieve in 2025. The credibility of Romania’s plan will influence how the European Commission manages the fiscal deviation observed last year.
Failure to reduce the deficit could lead to a sovereign rating downgrade, raising borrowing costs and risking suspension of EU funds, as indicated by Fitch Ratings. The government is considering tough measures including cutting 20% of civil servant jobs, increasing tax rates on profits and dividends to 16%, and raising VAT on energy-related items.
In conclusion, Romania's fiscal correction plan involves a comprehensive reform strategy aimed at deficit reduction through tax increases, expenditure caps, and institutional strengthening. The plan’s credibility and implementation will be crucial to avoid negative financial consequences as highlighted by Fitch Ratings. The government's ability to demonstrate credible steps toward reducing the deficit and stabilizing public debt will be crucial for the outcome of the Fitch review.
The fiscal correction plan, in the context of Romania's economic struggles, aims to strengthen investor confidence and improve financial indicators within the industry, politics, and general-news sectors, by implementing measures such as tax increases, expenditure caps, and institutional strengthening. The plan's success, as seen by Fitch Ratings, is vital to avoid a sovereign rating downgrade, potentially leading to increased borrowing costs and the risk of suspension of EU funds, necessitating tough decisions like job cuts and increased tax rates.
