You are seeing a classic dynamic content issue. With that in mind I think it's worth considering how your design endures (lasts over time).
I would suggest you design is able to handle dynamic content elegantly and to this end, I would suggest increasing the height on the item to wrap onto a second (or third) line based on the content. This would involve setting a minimum height for your items, but allowing the actual height to be dynamic.
If you expand the navigation width then you will either see the issue occur again in the future when another longer item needs to be added or you will have a nav panel where the width changes over time based on content, potentially worst case to the width of the viewport.
If you reduce the font-size, then you will have inconsistent sizing between elements which to a user usually indicates a lower priority item. If you were to reduce font-size for all elements that would be better, but seeing as this is harder to do dynamically you might end up needing to do this over and over as new items are added.