International agency S&P affirmed Romania's BBB-/stable sovereign rating and said it would not take negative actions unless the government deficit exceeded its rather comfortable current medium-term projections or if other existing imbalances such as high inflation or substantial current account deficits persisted.

S&P doesn't have great expectations from Romania's twin deficit narrowing, but it believes that the European Commission will delay some Resilience Facility funds as a result of a perceived lack of improvement in the country's fiscal position. 

The rating agency expects Romania's fiscal and external deficits to reach, in 2027, the targets envisaged by the government for 2024. The three-year delay will cost Romania's public indebtedness (public debt to GDP) 5.5 percentage points, bringing it to 57.2% in 2027 – above the current BBB median that we estimate at 55%-56%.

Despite the procyclical fiscal policy, S&P revised its economic growth projection for Romania downwards to 1.6% this year and 2.9% of GDP in 2025. Strong domestic demand will rather fuel the trade deficit, the rating agency implies. The economic growth would remain moderate, at 2.6%-2.7% in 2026-2027.

S&P projects a 7.3%-of-GDP fiscal deficit this year (compared to the 6.9% official target) and doesn't expect the gap to narrow below 5% of GDP until 2027, "in line with the minimum fiscal correction required by the EU's Excessive Deficit Procedure" for the coming three years. 

This is a somewhat realistic fiscal consolidation trajectory. However, when it comes to revenues and expenditures separately, the forecast gets complicated by the effects of the Resilience Facility and the Pension Law. 

"Fiscal policy from 2025 remains uncertain," the rating agency admits.

S&P expects Romania to cut its public expenditure from 42.1% in 2024 to 40.8% of GDP in 2025 – which is rather surprising, considering the 1% of GDP supplementary spending generated by the Pension Law in 2025 compared to 2024. However, public spending in 2027, after the Resilience Facility terminates, is expected at 39.5% of GDP – 3% of GDP more compared to 2019 (36.5% of GDP), before Covid-19.

The revenues would decrease from 34.8% of GDP in 2024 to 34.5% of GDP in 2025 (meaning that S&P's scenario assumes no significant tax rate hike next year) and remain at this level until 2028, according to S&P. It remains unclear how this would be possible after the Resilience Facility ends in 2026. The 2028 budget revenues figure indicates a 2.5%-of-GDP improvement versus 32% in 2019. Significant, but not enough according to the government's promised gains from digitalisation and lower VAT evasion.

S&P's public deficit projection is expected to result in a public indebtedness of 57.2% of GDP at the end of 2028, up from 51.7% at the end of 2024. By the end of the fiscal consolidation cycle, the gap would thus hit the 60%-of-GDP benchmark.

On the external balance side, S&P expects the current account deficit to widen from 7% of GDP in 2023 to 8.3% of GDP in 2025 and decline slower, to 7.3% of GDP in 2027.

Partially mitigating the external imbalance, non-debt-creating inflows in the form of EU funds and net foreign direct investments (FDIs) will continue to fund around 50% of Romania's external deficit.

Ten years after evading junk status, Romania has no further upgrade in sight.

S&P upgraded Romania from junk status to investment-grade rating ten years ago in May 2014. At that time, the rating agency was expecting Romania's public debt to drop from 22% of GDP to 15% of GDP in the medium term, amid an average public deficit of 2% of GDP.

Ten years and two crises (Covid and Russia's war in Ukraine) later, the country's public finance and external balance metrics (seen by all rating agencies as key markers for the country's macroeconomic health) have deteriorated dramatically. 

On the upside, over the same ten-year period, Romania's GDP per capita measured in PPP terms rose from 56% (in 2014) to 80% (in 2023) of the EU's average.

iulian@romania-insider.com

(Photo source: Michael Vi/Dreamstime.com)