According to a report by S&P, the negative outlook reflects Romania’s general government deficit of almost 8.7% of gross domestic product (GDP) in 2024, which was pushed substantially above S&P’s expectations by high pre-election spending, the global ratings agency said in a statement on Friday. Moreover, the government’s fiscal consolidation agenda is likely to be delayed by the country’s fragmented and uncertain political environment.
In early December 2024, Romania’s Constitutional Court annulled the presidential election process due to illegal campaigning and alleged Russian interference which propelled ultranationalist Calin Georgescu to an unexpected lead in the first round. Meanwhile, the general election held after the first round of the presidential elections resulted in a more fragmented parliament, marked by gains for far-right, anti-EU parties. Romania will hold the rescheduled presidential election on May 4, with a potential runoff to be held on May 18.
“The negative outlook reflects our view of rising risks to Romania’s public finances over the next several years. This follows average deficits of 7.6% of GDP since 2020, while the debt-to-GDP ratio has increased by more than 15%. In our view, delivering on the government fiscal consolidation plan could be challenging, not least because of the increased political fragmentation evidenced by the outcomes of last year’s elections as well as slower economic growth prospects. In the absence of additional measures, we expect deficits will not dip below 6% of GDP before 2028,” S&P also said in its report.
Romania, which has been subject to the EU’s excessive budget deficit procedure since 2020, had initially pledged to align its budget deficit with the EU’s ceiling by 2024. However, in August, the government proposed a plan to reduce the gap to below 3% of GDP over the next seven years, citing co-financing investment needs under the National Recovery and Resilience Plan. In October, the government published the medium-term budget plan for 2025 – 2031, with a budget deficit target of 2.5% of GDP for 2031. Last month, Romania’s government adopted a package of fiscal measures meant to cut the budget deficit to 7% of GDP in 2025, which is the first annual goal set in the medium-term budget plan. Last week, the European Union’s Economic and Financial Affairs Council approved Romania’s seven-year fiscal-structural plan.
S&P added that it expects the country’s public debt, net of liquid government assets, to exceed 60% of GDP by 2027 and the government’s interest bill to settle likely around a high 8% of revenue over the medium term. A pro-cyclical fiscal policy and high wage growth have led to Romania recording Central and Eastern Europe’s highest annual HICP inflation rate in December, at 5.5%.
“Core inflation remains above headline inflation, which raises the risk of inflation remaining persistent over the next several months, in our view. Upside risks stem from energy prices, food prices, and changes to taxes and excises. Therefore, we expect inflation to remain above the NBR’s [National Bank of Romania] target of 2.5% (plus or minus 1 percentage point) at least over the next two years, especially in the case of protracted fiscal consolidation and elevated wage growth,” the ratings agency explained.
The expansionary fiscal policy also contributed to a widening current account deficit (CAD), which likely exceeded 8% of GDP in 2024, S&P said. The ratings agency expects the CAD to only gradually reduce to 6.9% of GDP on average between 2025-2028.