By Luiza Ilie
BUCHAREST (Reuters) – Romania has yet to present credible measures to offset the budget impact of planned pension hikes in the 2024 election year, Standard & Poor’s said, as rating agencies warned the country’s deficit could remain high for the foreseeable future.
Romania, one of the European Union’s poorest states, passed legislation last week under a framework agreed with the EU in exchange for recovery funds to put its pension system on a sustainable path.
The measures are aimed at eliminating inconsistencies in the way state pensions are calculated and include a gradual increase in the retirement age, the indexation of pensions to inflation from January and another big hike from September.
S&P said the pension hikes could push Romania’s deficit more than one percentage point above its baseline expectations over the next three years and that government plans to improve tax collection seemed inefficient to close the gap.
“At this point, none of these measures are concrete or sufficient enough to fully counterbalance the potential rise in pensions, in our view,” Arnaud Humblot, Director for Ratings Communications at S&P said in an emailed reply to questions.
The European Commission forecasts Romania’s budget deficit at 5.3% of economic output next year, not including the cost of the planned pension hikes. That would be one of the highest levels in the EU and nearly twice the 3% level Romania would need to exit an EU fiscal surveillance mechanism.
Press officials for the EU Commission did not immediately respond to questions for comment.
Fitch said the planned recalculation of pensions from next September was an “unexpected element” of the reforms.
“Romania’s new pension law could result in a less favourable sovereign debt trajectory and weaken fiscal credibility over the medium term if implemented as planned and without offsetting measures,” it said.
Moody’s said an expected 1.7% of GDP worth increase in Romania’s 2025 budget deficit was a “credit negative.”
“While the reforms will substantially reduce the projected increase of pensions expenditure over the longer term, the savings will mainly accrue in the 2030s and beyond,” it said.
The uncertainty about Romania’s 2024 budget, which has yet to be unveiled, would weigh on the country’s funding costs, public debt chief Stefan Nanu said.
“Obviously until we have a budget, until the exact way in which the government will weather this period is shown, there is uncertainty and it will weigh on funding costs,” he told a seminar.
(Reporting by Luiza Ilie; Writing by Gergely Szakacs; Editing by Christina Fincher)