Romania's seven-year plan to narrow budget gap may test markets' patience, fiscal watchdog says

The prospect of presidential and parliamentary elections in central Europe's second-largest economy in November and December has triggered a spending surge that is expected to push Romania's 2024 budget deficit to 8% of GDP.

At the end of October, Romania submitted a plan to Brussels to cut its deficit below the EU's 3% of GDP ceiling within seven years, with ratings agencies and analysts expecting tax hikes.

"It is not mission impossible, but it is going to be very hard," head of Romania's Fiscal Council Daniel Daianu told a conference in Budapest.

"Seven years seems to be reasonable, but I don't know about the patience of markets," he later told a panel discussion. "We are being pushed by financial markets unless we are prudent. If we make big mistakes we are going to get punished."

Romania has yet to unveil a 2025 budget, and analysts say the formation of a new government and policy could be complicated by the shock outcome of last Sunday's presidential election that pitted a hard-right critic of NATO who has praised Russia against a center-right opposition leader in the December 8 runoff vote, as the leaders of the two ruling parties were eliminated. Analysts say the far-right could now win at least a third of seats in parliamentary elections next Sunday.

The shock result sent 10-year Romanian bond yields to their highest level in 19 months on Monday.

Daianu, however, said that Romania's public debt of 50% of GDP is still "manageable," while EU membership and cohesion funds provided to poorer members of the bloc played an important role in economic stability.

Given that Romania has one of Europe's lowest tax takes, there is scope to raise revenue to shore up the budget, Daianu said, without elaborating on whether this meant higher tax rates or improved tax collection.

Earlier this month the European Commission forecast Romania's budget deficit would run close to 8% of GDP over the next two years under unchanged policies, driven in part by the cost of a pension reform and higher interest payments.

The Commission said it could not take potential deficit-reducing measures proposed in October by Romania into account as they were not sufficiently detailed.

"However, they have the potential to significantly lower the government deficit relative to this forecast, if properly designed and implemented in the context of the budget for 2025," it said.

Goldman Sachs economists said the backlash against mainstream parties in Romania's presidential election could complicate efforts to rein in the deficit.

"In our view, the primary political risk for Romania is not the uncertainty over the composition of the government - which polls suggest will continue to be made up of 'mainstream' parties - but whether the new administration will address the rising fiscal challenges," they said.

Financial markets might run out of patience with Romania's high fiscal deficit, chairman of the country's fiscal watchdog Daniel Daianu warned on Tuesday, saying Bucharest's seven-year plan to narrow the gap risked being too slow for some investors, Reuters reports.

The prospect of presidential and parliamentary elections in central Europe's second-largest economy in November and December has triggered a spending surge that is expected to push Romania's 2024 budget deficit to 8% of GDP.

At the end of October, Romania submitted a plan to Brussels to cut its deficit below the EU's 3% of GDP ceiling within seven years, with ratings agencies and analysts expecting tax hikes.

"It is not mission impossible, but it is going to be very hard," head of Romania's Fiscal Council Daniel Daianu told a conference in Budapest.

"Seven years seems to be reasonable, but I don't know about the patience of markets," he later told a panel discussion. "We are being pushed by financial markets unless we are prudent. If we make big mistakes we are going to get punished."

Romania has yet to unveil a 2025 budget, and analysts say the formation of a new government and policy could be complicated by the shock outcome of last Sunday's presidential election that pitted a hard-right critic of NATO who has praised Russia against a center-right opposition leader in the December 8 runoff vote, as the leaders of the two ruling parties were eliminated. Analysts say the far-right could now win at least a third of seats in parliamentary elections next Sunday.

The shock result sent 10-year Romanian bond yields to their highest level in 19 months on Monday.

Daianu, however, said that Romania's public debt of 50% of GDP is still "manageable," while EU membership and cohesion funds provided to poorer members of the bloc played an important role in economic stability.

Given that Romania has one of Europe's lowest tax takes, there is scope to raise revenue to shore up the budget, Daianu said, without elaborating on whether this meant higher tax rates or improved tax collection.

Earlier this month the European Commission forecast Romania's budget deficit would run close to 8% of GDP over the next two years under unchanged policies, driven in part by the cost of a pension reform and higher interest payments.

The Commission said it could not take potential deficit-reducing measures proposed in October by Romania into account as they were not sufficiently detailed.

"However, they have the potential to significantly lower the government deficit relative to this forecast, if properly designed and implemented in the context of the budget for 2025," it said.

Goldman Sachs economists said the backlash against mainstream parties in Romania's presidential election could complicate efforts to rein in the deficit.

"In our view, the primary political risk for Romania is not the uncertainty over the composition of the government - which polls suggest will continue to be made up of 'mainstream' parties - but whether the new administration will address the rising fiscal challenges," they said.

(Fluierul)