“The negative outlook reflects our view that despite efforts, implementation risks relating to the consolidation of Romania’s public finances will remain elevated over the coming years,” S&P said in a press release on Friday evening. The outlook also reflects Romania’s vulnerability to mounting external risks on global energy markets as its pressured fiscal accounts and balance of payments positions leave little room to absorb deepened or prolonged external shocks, it added.
The agency could lower the ratings over the next two years if Romania’s fiscal consolidation path deviates significantly and if the government’s consolidation measures are insufficient, or subdued economic growth impedes their effectiveness. Delays in the payment of EU funds would exacerbate pressures in this scenario, S&P added.
S&P could also consider a downgrade if external pressures, such as a lengthy energy market disruption from the Middle East war, unsettle the country’s inflation and weaken its economic growth, balance of payments, and fiscal outcomes.
At the same time, S&P could revise the outlook to stable if Romania’s external and fiscal deficits narrowed substantially, supported by a rebound of economic growth.
S&P also said in the statement:
“Rationale
Despite weakening growth, and the second round effects on fuel prices from the Middle East war, we project that Romania’s four-party government coalition will make progress toward implementing its planned fiscal measures to bring the general government deficit to 5.5% of GDP in 2027 compared with 9.4% of GDP in 2024. The weak starting point for public finances means that the objective to reduce net public borrowing below 3% of GDP, as per EU Maastricht Treaty requirements, stretches out beyond 2030. During that time, debt to GDP will remain on a rising path, increasing to over 65% by the end of this decade.
While the parties that make up the governing coalition disagree on some specific measures, the toughest fiscal measures–including the value-added tax (VAT) hike, and the pension and public sector wage freezes–are already in place. Nevertheless, the outbreak of the conflict in the Middle East, and the fallout this is having on global energy supply and prices represents another shock to Romanian households. We now project Romania’s economy will face near-stagnation in 2026 as fiscal consolidation, eroding real wages and higher energy prices pressure private consumption. Our forecast is 1 percentage point lower compared with our previous publication, although our expectation of a record level of EU-funded investments will partially offset these factors.
We forecast inflation will average 7.25% in 2026, compared with 6.75% in our previous forecast, and 4.5% over 2027, on the back of higher oil and gas prices. We forecast the more elevated price pressures on imports will keep the nominal current account deficit elevated in 2026, despite real imports stagnation from depressed private consumption. One mitigating factor is that Romania has a fairly self-sufficient energy position. Its energy import dependency, at 30%, is among the lowest in the EU.
The outlook for Romania’s balance of payments is stabilizing Record-high inflows of EU funds alongside steady foreign direct investments will finance the majority of Romania’s still elevated current account deficits over 2026-2027. An uninterrupted inflow of EU funds underpins our near- and medium-term growth forecast, as public investment is set to accelerate this year and next. We forecast economic growth will rebound to 2.5% over 2027-2029.
Institutional and economic profile: Maintaining fiscal consolidation while avoiding a domestic demand collapse is a key policy challenge for the coalition
Romania’s economy faces stagnation in 2026 as fiscal consolidation, elevated energy-driven inflation, and falling real wages suppress private consumption. EU-funded investments stand as the only meaningful counterweight.
Romania’s comparably low energy imports dependency and the reduced energy-intensity of its industrial base over the past two decades buffer some of the direct impact of the rising commodity prices in the wake of the Middle East war.
We expect the government to navigate situations of policy disagreement, fend off consolidation fatigue, and keep its consolidation program on track over 2026-2027.
Romania’s economy experienced a marked slowdown in 2025, with GDP growth decelerating to 0.7% and a technical recession emerging in the fourth quarter. The contraction, at -1.9%, represented the largest quarter on quarter contraction since 2012, excluding the pandemic, signaling a shift away from a consumption-driven growth model. While investment in construction, IT and communication, and agriculture–alongside EU-funded projects–provided some support, this was offset by weakening services and flat household consumption. We project real economic growth will further decelerate to 0.25% in 2026, with nominal growth at 7.4%, due to negative carryover from 2025, a strongly negative fiscal impulse from budgetary consolidation, muted private consumption alongside rising oil and commodity prices linked to geopolitical instability. We forecast growth will rebound to 2.5% over 2027-2029, contingent on sustained infrastructure investment, a less restrictive fiscal stance, recovery in consumption, improved external demand, and the effective and timely utilization of Next Generation EU funds.
Romania’s economy continues to face several longer-term challenges, including adverse demographic trends, which will persist. The declining working-age population could increasingly drag on growth, absent reform efforts to address skill mismatches or improve the business environment, and ultimately to slow emigration. Over the past decade, Romania’s working-age population has decreased by about 1.1% per year, and we expect that this will moderate only marginally over the next few years.
Romania’s front-loaded austerity introduced in 2025 has narrowed the government’s deficit but also helped tip the economy into a technical recession and has strained the coalition. The current government comprises four parties: The Social Democratic Party (PSD); the National Liberal Party (PNL); the pro-reformist Save Romania Union (USR); and the Democratic Alliance of Hungarians in Romania (UDMR). A group of independent delegates also feature heavily; combined, these hold almost two-thirds of parliamentary seats. The implementation of several reform items, as well as the stringent consolidation agenda, will test the cohesion of the government coalition.
We expect the government to manage periods of tensions but recognize risks to the implementation of the announced fiscal measures and the broader reform agenda. These relate for example to potential flare-ups of contentious intra-coalition disagreements, rising public discontent, or growing consolidation fatigue, all of which could disrupt the implementation of government’s commitment to consolidation. In addition, we note that Prime Minister Ilie Bolojan’s mandate will cease at the end of 2026 as part of a power-sharing arrangement with the PSD (whereby he is required to transfer his position to a coalition partner). This power sharing arrangement improves the government’s longevity in our view despite it having to implement unpopular measures. That said, we expect political cohesion and overall stability to become more concretely contested before the next parliamentary elections in late 2028.
Unlocking EU funds for public investments will be vital for Romania’s economic growth over the medium term. A key pillar of the recovery strategy is the accelerated disbursement of approximately €55 billion in EU funds, particularly from 2026, to offset fiscal drag and drive investment. For 2026, we expect that, in exchange for accelerating the implementation of the EU Recovery and Resilience Facility (RRF) milestone reforms, Romania could receive about 3% of GDP in EU transfers from both the RRF and Stability and Cohesion Fund Programs. In combination with steady inflows of foreign direct investment at about 2% of GDP and drawdowns from the EU’s Security Action for Europe (SAFE) facility, we assess these resources will finance 50%-60% of Romania’s balance of payments deficits in 2026-2027. Romania holds the second-largest allocation of SAFE loans after Poland, at €16.68 billion.
In our view, the large EU funds inflows underpin the resilience of Romania’s external profile. There are few other emerging market economies that have access to this scale of nondebt external financing. For that reason, the incentives for Romania’s government to move ahead with the budgetary adjustment are powerful. Conversely, the disincentives, in the form of balance of payments-related pressures on borrowing costs and the exchange rate, are also significant. Aside from exacerbating the external weakness, any delays or shortfalls in EU funds absorption would put additional pressure on domestic financing and growth.
Flexibility and performance profile: Strengthening fiscal performance amid rising external debt and inflationary challenges
Romania’s fiscal performance is strengthening through sustained consolidation measures.
The 2026 budget balances fiscal consolidation with increased public investment and defense spending.
Romania’s wide external deficits should recede in tandem with the improving fiscal balances, but renewed inflationary pressures could accentuate vulnerabilities.
The governing coalition’s sustained consolidation measures have boosted Romania’s fiscal performance, but execution risks and potential legal challenges remain. Throughout the second half of 2025 and into 2026, the government advanced multiple reform packages–including VAT increases, excise duty hikes, and adjustments to corporate income tax. This has resulted in an improvement in the general government deficit to 7.7% of GDP in 2025, from 9.4% in 2024.
We view Romania’s 2026 budget as a commitment to continued fiscal consolidation through spending controls, administrative improvements, and wage and pension freezes. The budget simultaneously prioritizes substantial increases in public investment (8% of GDP, most of which is EU-funded) and defense spending (rising to 3% of GDP), intended to support growth and long-term potential. Political and practical execution risks remain, however, stemming from potential legal challenges to budget enactment and persistent vulnerabilities related to tax collection efficiency and the reliance on successful administrative reforms. Furthermore, in the wake of energy price shocks, the government has implemented some support measures for the transport and agriculture sectors (under 0.5% of GDP). These are accompanied by measures that shift the increased cost to distributors and retailers and in our estimation do not represent a direct fiscal outlay.
While the fiscal efforts for 2026 are clear, the authorities have yet to specify fiscal measures beyond that period. Moreover, Romania remains under the Excessive Deficit Procedure (EDP), which it entered in 2020. EU sovereigns under the EDP are required to reduce budget deficits to 3% of GDP over an adjustment period of, at most, seven years. In Romania’s case, this would imply a fiscal adjustment of 0.8%-0.9% of GDP each year over this maximum adjustment period.
We estimate Romania’s net general government debt will exceed 60% by end of 2029 up from 52% in 2025. We recognize that external debt makes up over half of the total–an indication of the strong link between the twin fiscal and external deficits. We forecast Romania’s interest bill will continue increasing, from slightly above 2% of GDP in 2024, to an estimated 2.9% in 2026, and to 3.4% by 2028.
Improving the government’s tax collection abilities is a key enabler to the fiscal consolidation agenda. At 30%, Romania’s VAT gap (the difference between the amount of VAT a government expects to collect and the amount it actually collects) is the highest in the EU. The government expects further revenue gains from improving the tax administration’s efficiency over the medium term. Government capital expenditure is mainly linked to the timely flow of EU funds.
Romania’s external position shows tentative signs of stabilization, though remains a key vulnerability. The current account deficit narrowed modestly to 8.0% of GDP in 2025, driven by decelerating import growth and a 10% increase in exports in dollar terms, alongside a resilient services sector. While external debt has risen significantly, increasing by €23.8 billion to €227.3 billion in 2025, the sovereign benefits from a substantially strengthened net international reserves position, at €77.017 billion, providing a considerable buffer against external shocks. Increased reliance on domestic retail funding schemes, alongside a persistent current account deficit, continues to pressure the external profile, but is mitigated by rising EU fund absorption and positive foreign direct investment inflows. We forecast these nondebt creating inflows will keep Romania’s narrow net external debt below 50% of current account receipts through our forecast period.
Romania’s external performance faces headwinds from geopolitical uncertainty, with potential impacts on export growth in 2026, though its relatively low energy import dependence offers some cushion to escalating energy prices. We project continued, albeit gradually narrowing, current account deficits averaging 5.75% of GDP through 2027-2029, driven by sustained import growth linked to EU fund absorption and recovering domestic demand, resulting in gross external financing needs remaining around 100% of current account receipts and usable reserves.
We expect the external financing mix will benefit from rising EU fund inflows over the next few years, following a temporary dip in 2024. Overall, nondebt-creating inflows of EU investment grants and foreign direct investment could cover 50%-60% of current account deficits on average, supporting the central bank’s strong reserve position. We estimate reserves will remain at more than four months of current account payments over the next three years. Even so, we expect Romania’s narrow net external debt will approach 50% of current account receipts by 2028, over 10 percentage points higher than in 2023.
Romania’s disinflationary trend was interrupted by renewed inflationary pressures in early 2026, with inflation reaching 8.3% in February (measured by the harmonized index of consumer prices). We project this could peak around 10% in the second quarter, largely driven by rising oil and gas prices. While favorable base effects from the mid-2025 tax hikes and energy price liberalization are expected to drive disinflation from the third quarter, elevated inflation expectations, and indirect effects from commodity prices continue to pose risks. We now forecast average inflation of 7.25% for 2026, revised upward by 0.75 percentage points to reflect the impact of increasing energy costs. We believe inflation could land close to 5% for the full year.
Romania’s banking sector is predominantly foreign-owned and largely domestic-deposit-funded; we consider it a limited contingency risk for the government. Nonperforming loans remain within the European Banking Authority’s defined low-risk bucket, despite a marginal increase. Banks’ profitability decreased slightly as of September 2025 from a peak in 2023. Capital and liquidity ratios remain healthy, slightly above the average for countries in Central and Eastern Europe. Loans to the private sector remain near 22% of GDP, reflecting low financial intermediation. The banking sector’s elevated exposure to construction and real estate lending, alongside companies’ rising debt and a considerable share of foreign currency loans, could test the financial sector’s stability if related risks were to materialize”.