(Bloomberg) -- Romania’s new pension law increases the country’s already elevated fiscal risks and adds pressure to its sovereign credit rating, currently at the lowest investment grade with a stable outlook, analysts at Moody’s Investors Service and Fitch Ratings said.
The bill, which was approved by parliament in Bucharest late on Monday and still needs to be signed by President Klaus Iohannis, includes two pension increases next year and has an estimated budget impact of 0.6% of gross domestic product in 2024, according to Labor Minister Simona Bucura-Oprescu.
For 2025, the impact is bigger at 1.7% of GDP, which adds to “Romania’s already elevated fiscal deficit, a credit negative,” according to Moody’s senior analyst Petter Bryman.
The measures would negatively impact “debt affordability metrics until the late 2020s, weakening Romania’s fiscal strength over the coming years,” Bryman said in a report sent to Bloomberg.
Romania has been struggling to keep this year’s budget deficit at around 5.5% of output after an initial target of 4.4% proved unrealistic in the face of slower revenue growth and higher spending.
The government has already approved three packages of spending cuts this year and is counting on a crackdown on tax evasion and the digitization of the tax agency to improve collection. Tax revenue is currently at one of the lowest levels in the European Union at as little as 27% of GDP.
“In the absence of any offsetting measures the unexpected fiscal loosening would undermine the credibility of Romania’s fiscal strategy, in particular its commitment to bring the budget deficit below 3% of GDP,” Fitch analyst Gergely Kiss said in e-mailed response to Bloomberg questions. “A loss of credibility and more persistent, large fiscal deficits, as seen already in 2023, can lead to more unfavorable debt trajectory. This could be negative for the rating.”
The nation has been under the EU’s excessive deficit procedure since before the pandemic — and the new pension law may keep the gap at around 6% of GDP in 2024 and 2025, according to Bryman.
Fiscal pressure is expected to rise further next year, with the Balkan nation scheduled to hold four rounds of elections, including parliamentary and presidential ballots.
That makes it “less likely that the government will be able to raise taxes or reduce spending beyond what is already planned over the coming year in order to fund the pensions increase,” Bryman said.
(Updates with comments from Fitch analysts from first paragraph, background throughout.)
©2023 Bloomberg L.P.
BNN Bloomberg Picks
READ: The Bank of Canada's statement on its latest rate decision
UPDATED: A timeline of Bank of Canada rate hikes
Next six months 'will be quite a challenge': Desjardins CEO
Where could gold prices go in 2024?
Approach art investing as you would stocks and bonds: expert
High rates untenable amid household 'debt crisis': Rosenberg