Fitch maintains Romania’s investment-grade rating but budget strains remain

(Reuters) -Fitch maintained Romania’s investment-grade credit status on Friday, keeping its "BBB-" rating after the new government pushed through steps to ease its budget deficit, but the outlook remained "negative" due to persistent financial pressures.

A re-run presidential election earlier this year brought centrist Nicusor Dan into power in May after the country’s worst political crisis in decades. The new broad coalition government has recently pushed through a series of tax increases and spending measures, aiming to cut the European Union’s largest budget deficit.

"Nevertheless, the socio-economic cost of the fiscal adjustment, tensions within the government coalition and strong support for far-right populist parties remain significant political challenges," Fitch said.

The two-month-old cabinet of Prime Minister Ilie Bolojan is already grappling with a stalemate over planned cuts to state spending and public administration jobs. Its largest party, the leftist Social Democrats, have walked out of coalition meetings.

The leftists, without which a ruling majority cannot be sustained, oppose cuts to EU-funded investment projects and to a controversial state budget investment scheme for local administrations.

Fitch said it estimates Romania’s budget deficit will remain among the highest in the "BBB" category, even while easing from last year’s 9.3% of output to a forecast 7.4% this year and 6.3% in 2026.

"Fiscal consolidation will only mitigate the upward pressure on debt given the very high starting deficit," it added.

The central bank, prime minister and finance minister all warned earlier this week that recession risks have increased. Fitch sees growth at 0.7% this year.

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Like Fitch, Standard & Poor’s and Moody’s rate central Europe’s second-largest economy on the last rung of investment grade with a "negative" outlook.

S&P affirmed Romania’s sovereign credit rating in an unscheduled ratings review in July but warned that the pending spending cuts will test the cabinet’s stability. Moody’s will review Romania in September.

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