International rating agency predicts Romania’s fiscal deficit could reach 6.1% of GDP in 2026, if fiscal-budgetary measures plan is fully implemented

International rating agency Moody’s appreciates the Romanian Government’s efforts to reduce the budget deficit, considering the recently undertaken fiscal-budgetary measures as “an important step” towards budget balancing. In the agency’s latest report, published on July 9, Moody’s emphasizes that the Government’s plan should reduce the deficit and slow down the growth of public debt faster than previously anticipated.

According to the report, the fiscal package assumed this week will generate a consolidation of approximately 0.6% of GDP for 2025, the significant contribution coming from the increase in VAT rates starting August 1, 2025. For 2026, Moody’s estimates a budgetary consolidation of approximately 3% of GDP, as a cumulative effect of the measures adopted in 2025 and those that will apply from 2026 (increasing taxes on dividends and capping the indexation of public sector salaries and pensions).

At the same time, the agency emphasizes that the full and efficient implementation of the measures and maintaining fiscal discipline will be essential for returning to the fiscal-budgetary trajectory, given the magnitude of the planned consolidation.

“Following the confidence signal received on July 8 in Brussels, within the ECOFIN, Moody’s analysis reconfirms that the current Government’s strategy is a sustainable one, which will rebuild trust in Romania. We continue to implement the necessary reforms not only to consolidate public finances, but also to make Romania an increasingly attractive investment destination, offering more opportunities to all,” said Finance Minister Alexandru Nazare.

Main recommendations and challenges signaled by Moody’s: 

The Moody’s report highlights a series of recommendations and challenges essential for the success of Romania’s fiscal consolidation:

• Strict adherence to fiscal targets: Moody’s emphasizes that strict adherence to the established fiscal targets is essential for the success of the consolidation program. Firm commitment to budgetary objectives is considered crucial to maintain Romania’s fiscal credibility and to ensure a sustainable deficit reduction. The agency warns that any deviation from the assumed plan could undermine stabilization efforts and put further downward pressure on the country’s sovereign rating.
• Managing implementation challenges: The rating agency draws attention to the fact that the full and effective implementation of the fiscal package will be a significant challenge. Moody’s identifies the risk that some of the planned measures will not generate the estimated contribution to deficit reduction, either due to shortcomings in execution or unforeseen economic conditions. In this context, the recommendation is that the Government be prepared to make adjustments if necessary, to ensure that fiscal targets are achieved and the consolidation program remains on track.
• Implementation of the second package and PNRR reforms: Moody’s considers the full implementation of the second package of fiscal measures and the reforms set out in the National Recovery and Resilience Plan (PNRR) to be crucial for further fiscal consolidation and, implicitly, for accessing European funds.
• Maximising the absorption of EU funds: Accessing funds from the PNRR and the EU budget is essential for supporting economic growth, especially in the context of the impact of the fiscal consolidation program. According to Moody’s report, maximising the absorption of these funds will alleviate short-term economic pressures and contribute to achieving medium-term growth potential, while facilitating fiscal adjustment efforts.

Budget deficit and public debt on an improved trajectory

If fiscal measures are fully implemented, Moody’s anticipates that Romania’s fiscal deficit could reach 7.8% of GDP in 2025 and 6.1% of GDP in 2026. This represents an improvement over the agency’s previous forecasts, which indicated a deficit of 8.3% and 7.7% of GDP, respectively.

Regarding government debt, although it would continue to increase to 62.6% of GDP at the end of 2026 (from 54.8% in 2024), Moody’s now estimates that debt will peak at around 66.5% of GDP starting in 2029. This projection is below the peak of almost 71% of GDP forecast in March, when Romania’s outlook was changed to negative. The rating agency also appreciates the Government’s intention to adopt a second package of measures by the end of July this year, which could include new fiscal measures both to generate revenues and to reduce investment spending in 2025 and 2026.

These, together with reforms in the governance of state-owned companies and regulatory agencies, will further contribute to reducing the deficit, the report highlights. At the same time, Moody’s analysis published on July 9 refers to the decision to downgrade the rating to Negative on March 14, which mentioned that the decision may be reversed to Stable, if the economic situation improves. More specifically, if the indicators related to public debt sustainability do not worsen as much as Moody’s estimated at that time, Romania’s rating may be restored to a stable outlook.