Political instability to weigh on Romania's deficit reduction efforts beyond 2026, Fitch says

BUCHAREST, Aug 1 (Reuters) - Romania just avoided a downgrade from the last rung of investment grade as its budget deficit narrowed more than expected, but political instability after a government collapse have reduced policy visibility beyond 2026, Fitch Ratings said on Saturday.

The agency affirmed Romania's sovereign credit ratings at "BBB-/A-3" in a scheduled review late on Friday, and it kept a "negative" outlook due to ongoing pressures on the country's finances.

"In accordance with Fitch's policies, the Issuer appealed and provided additional information to Fitch that resulted in a rating action that is different than the original ... outcome," the agency said in a statement.

Romania does not yet have a government after the May collapse of a broad pro-European coalition that had been in office for 10 months, endangering access to European Union recovery funds (RRF) and efforts to further cut the largest budget deficit in the bloc.

Fitch said "the timing, composition and stability of a new government (is) highly uncertain amid deep divisions among former coalition partners." 

"Political dynamics have reduced visibility over fiscal strategy beyond 2026 and delayed approval of pending Recovery and Resilience Facility (RRF) reforms, which could lead to the loss of funds."

But the country's budget deficit stood at 2% of economic output in the first six months, down by almost half from the same period of last year, and Fitch expected the full-year shortfall at 5.9% of output.

The country is targeting a deficit of 6.2% of output under local accounting terms. 

Fitch said the medium-term risks to further deficit cuts were significant "due to implementation challenges, socio-economic costs of additional measures and political considerations ahead of the 2028 parliamentary elections."

The agency said it expected the Romanian economy to contract by 0.6% overall in 2026.

(Reporting by Luiza Ilie; Editing by Hugh Lawson)