The Romanian Government's proposed 14% pension increase from September would reduce the challenge of consolidating public finances compared to the previously budgeted 40% increase, Fitch Ratings says in a note on Romania on August 25.

However, Fitch warns that the final increase may depend on complex political calculations amid looming elections, and a large pension hike remains a risk to the agency’s baseline fiscal forecasts.

Fitch also makes a brief analysis of the political situation in Romania, given the coming local and parliamentary elections and the no-confidence motion initiated by the Social Democratic Party (PSD).

The agency’s conclusion is that the 40% pension increase is still possible, either as a policy choice (for example if the PSD takes power and pushes through its previous agenda), or as an unintended outcome of tactical political moves.

“The pension hike and political stability are both important to Romania's sovereign rating,” Fitch points out.

“One rating sensitivity is a sharp deterioration in medium-term debt sustainability, for example due to a failure to offset or delay increases in recurrent expenditure and/or implement a credible medium-term consolidation strategy following the pandemic shock. The larger the pension increase, the greater the challenge in introducing offsetting measures that would avoid this sensitivity being triggered,” the agency explains.

Fitch estimates a 14% hike would permanently increase the Romanian Government’s expenditure by 1-1.2pp of GDP from 2021 onwards, whereas a 40% increase would raise annual spending by 4pp.

Budgetary flexibility is limited and extra expenditure may be needed to tackle COVID-19, but offsetting revenue measures (such as a VAT rise) could prove unpopular and risk stifling economic recovery.

“How the authorities address underlying fiscal deterioration will also help determine how Fitch resolves the Negative Outlook on the sovereign's 'BBB-' rating. Romania's fiscal framework is among weakest in the EU and progress in anchoring medium term fiscal targets has been limited. There is scope for improvement particularly given prospects of substantial EU Fund support, but the uncertain political outlook creates downside risks,” Fitch concludes.

editor@romania-insider.com

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