Romania’s current account (CA) deficit surged 2.7 times to EUR 3.18 billion in February, and the deficit in 12 months to February rose by 43% y/y to EUR 31.8 billion, according to data published by the National Bank of Romania (BNR).

Driven by robust private consumption and a wide public deficit, the country’s external deficit reached a new record and contributed to rising macroeconomic challenges. The correction of the twin deficits is the key indicator followed by the rating agencies, which are likely to decide whether to push Romania’s sovereign to the junk region after the May elections, depending on the fiscal corrective package envisaged.

Separately, the wide external deficit makes Romania vulnerable to the sudden reorientation of financial flows caused by global uncertainty.

Romania’s CA deficit to GDP ratio, calculated based on the latest available 4-quarter GDP, reached 9.0% as of February 2025, up from 8.4% as of December 2024 and 6.8% as of February 2024. Admittedly, the ratio dropped marginally in March (other things equal), based on re-calculated 4-quarter GDP.

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14 April 2025

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The net foreign direct investments (FDI) accounted for only 1.4% of the GDP in 12 months to February 2025, down from 1.6% in 2024 and 2.2% in the previous 12-month period (12 months to February 2024). Net FDI to Romania contracted by 26% y/y to just over EUR 5 billion in 12 months to February 2024, with an insignificant contribution from new equity.

The CA deficit to GDP ratio exceeded 9.0% from August 2022 to February 2023, but at that time, the deterioration in the external balance was caused by significant external factors (costly natural gas imports) in addition to internal factors, while this time, the drivers are primarily internal (private consumption, public demand). 

It is unclear whether the fiscal corrective package likely to be endorsed after the May presidential elections will have the necessary magnitude to correct the twin deficits in line with expectations. At this moment, the ruling coalition claims no supplementary fiscal corrective package is necessary but admits that failure to implement the budget planning would make tax rate hikes unavoidable. 

Independent analysts expect a 2-3 percentage points VAT rate hike would be the preferred move in case the fiscal slippage doesn’t come under control. Q1 budget execution expected around April 25 may provide relevant insights about the direction of the budget deficit.

From 8.2% in 2024 (estimated at that time), Romania’s CA-to-GDP ratio is expected to decline, under the baseline scenario, to 7.3% in 2025 and gradually to 6.8% in 2028, according to the baseline scenario inked by S&P in January when revising the outlook on Romania’s BBB- rating from stable to negative. 

S&P warned it would lower Romania’s rating – putting it in the junk region – if the public finance metrics deteriorate at a faster pace, under the effect of either slower economic growth or government policies.

Under the baseline scenario (no supplementary fiscal package this year), Romania’s economy is expected to grow by 2.1% this year in 2025 (from 1.0% in 2024) and stronger rates (but never above 3%) in 2026-2028, according to S&P’s forecast in January. However, the global outlook has deteriorated meanwhile, dragging down Romania’s growth outlook as well.

In the 12 months to February, the CA deficit was primarily driven by the net import of goods (+20% y/y to EUR 34.4 billion), but all other main elements of the CA have deteriorated. The net export of services contracted by 13% y/y to EUR 11.2 billion.  

The primary income surplus, which measures the net outflow of interest, dividends, and wages, increased by 9% y/y to EUR 9.5 billion. 

The net inflows under the primary income account (measuring the transfers to public and private sectors, including informal wage remittances) contracted by 61% y/y to EUR 953 million despite still robust (despite marginal 1.5% y/y decline) inflows towards the private sector (EUR 2.4 billion in 12 months to February).

iulian@romania-insider.com

(Photo source: Vlad Ispas/Dreamstime.com)