The political impasse that hindered the adoption of a Wage Law for the budgetary sector may complicate the drafting of a credible 2027 budget in line with the medium-term fiscal consolidation plan set under the Excessive Deficit Procedure (EDP), which would significantly deteriorate the country’s credibility among foreign investors, according to Moody’s rating agency. Although the rating agency does not mention downgrade risk in its note, weaker political support for further deficit reduction was associated in its August 7 update with such risks. 

“In our opinion, the failure to adopt the public sector payroll law is a signal that a political consensus in favour of implementing and maintaining a large fiscal effort, which structurally controls the growth of expenditures, may no longer exist, despite the very substantial reduction in the deficit that we expect to see this year,” according to Moody’s note cited by Profit.ro.

Moody’s on August 7 affirmed Romania’s Baa3 sovereign rating, the lowest in the investment-grade region, and maintained its negative outlook, warning that high implementation risks surrounding the country’s multi-year fiscal consolidation programme could lead to a downgrade if political support for further deficit reduction weakens. The rating agency now interprets the failure to adopt the Wage Law as a sign of weak political support for further deficit reduction - implicitly a first step towards a downgrade decision. We expect the formation of a new ruling majority may provide further insights about the political commitment to budgetary discipline.

Moody’s estimates that Romania’s deficit will significantly decrease in 2026, after exceeding expectations in 2025, to reach 5.8% of GDP, equivalent to a reduction of more than two percentage points in a single year, amid spending restrictions and the maintenance of revenues, despite difficult macroeconomic conditions.

“However, given the failure to adopt this law, it remains to be seen whether this progress is sustainable or whether fiscal consolidation will lose momentum in the current fragmented political environment,” the agency noted.

Because public-sector wages account for over 20% of total spending and are a significant source of upward pressure on expenditure, the likelihood that spending growth will remain under control from 2027 onwards has decreased, according to Moody’s.

Moreover, the political impasse that ultimately prevented the passage of this legislation will make it more difficult to control borrowing costs, which remain sensitive to fiscal and political developments.

“This is important because Romania’s interest burden is still rising. Our current baseline assumption is that interest on public debt will rise to 3.3% of GDP in 2028, up from 2.8% in 2025,” according to the rating agency.

iulian@romania-insider.com

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