S&P is the third of the three major rating companies that affirmed Romania's sovereign rating (BBB-/negative) at the bottom of the investment-grade area, giving the Government time to settle the complicated fiscal slippage issue.

"Romania's complex political dynamics continue to obscure its future policy direction and the reliability of policy execution," the rating agency said a couple of days before the December 6 general elections.

"A balanced and credible fiscal agenda will be crucial," the rating agency's press release reads, indicating that such an agenda should go well beyond reversing recent one-off measures (like the 40% pension hike). Most of Romania's key budgetary allocations are structural, which inflicts further medium-term strain on an already rigid budget structure, S&P's analysts argue.

EU funds absorption will be vital in aiding economic rebalancing, although implementation risks remain. Romania's EU membership is "an important policy anchor" that largely explains the rating agency's confidence in the Romanian economy's rebalancing.

Romania will be a significant beneficiary of the structural funds designated under the EU's upcoming Multiannual Framework, alongside the newly created EU Recovery and Resilience Fund (RFF).

The grants portion alone under the RFF equals about 6% of Romanian 2019 GDP, and a similar amount in loans is available to unlock access to cheap financing.

Should the funds be fully deployed and successfully absorbed, they would help sustain Romania's growth prospects, facilitating the budgetary rebalancing that we envision in our base case for 2021-2023, S&P reasons.

Under its base-case scenario, S&P expects that the incoming Government will take firm steps toward a viable fiscal consolidation during its term.

The rating agency says it could lower its ratings on Romania if fiscal and external imbalances remain elevated "for longer than we currently anticipate," for instance, because of challenges to fiscal policy design after the upcoming elections.

The agency anticipates a 2pp correction in Romania's budget deficit, from 9.2% of GDP this year to 7.2% of GDP in 2021 - in line with the plan voiced by incumbent Liberal finance minister Florin Citu, who expects to remain in office backed by a robust majority in Parliament after the December 6 elections.

The rating agency further anticipates gradual fiscal consolidation to 4% of GDP in 2023.

Regarding the current account deficit, S&P expects the slight narrowing this year, to 4.5% of GDP (from 4.7% of GDP in 2019), to reverse in 2021, resulting in a CA gap of around 5.1% of GDP over the coming years. S&P projects that Romania's economy will contract by 5.2% in 2020 before rebounding by 4% in 2021.

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andrei@romania-insider.com