S&P warns Romania planned pension hike could derail economy

BUCHAREST, Sept 29 (Reuters) - S&P Global Ratings warned Romania on Tuesday that a move by parliament to reinstate a massive 40% raise in pensions would prompt a disorderly fiscal correction just as the economy is struggling with the impact of the coronavirus pandemic.

Romania’s parliament voted this month to raise all state pensions by 40%, undoing a smaller 14% hike by the centrist minority government and opening the way for potential ratings downgrades two months before a parliamentary election.

The government, which has tried to curb social spending surges backed by the opposition Social Democrats - parliament’s biggest party - will challenge the pension hike in the top court and stall for time until a Dec. 6 parliamentary election it is seen winning.

“We believe that if the pension hike will stand, Romania will have bitten off more than it can chew, fiscally speaking,” S&P said in a statement, adding its next ratings review for Romania was on Dec.4.

“Such a sizable increase in permanent spending, if implemented, would be detrimental to both Romania’s fiscal and external performance, and would likely prompt a disorderly budgetary correction with repercussions on the economy’s fragile rebound post-COVID-19.”

The agency said the pension hike, coupled with other social spending could push Romania’s budget deficit above 10% in 2021 where it will remain for the following two years.

Even before the pandemic, Romania was struggling with a widening budget shortfall, eroded by years of political instability and fiscal largesse. S&P, Moody’s and Fitch Ratings have Romania on their lowest investment grade, with negative outlooks.

The government has estimated the pandemic will push this year’s deficit to 8.6% of GDP, with the economy contracting by 3.8%. The European Union state has reported 125,414 infections and 4,792 deaths since late February. (Reporting by Luiza Ilie; Editing by Alison Williams)