Romania: Macro imbalances call for political stability

“Prediction is very difficult, especially if it’s about the future!” Niels Bohr, the Nobel laureate in Physics, once said. This sentiment rings true in the wake of the first round of Romania’s presidential elections, where the consensus was upended. The Constitutional Court annulled the elections, citing interference by a foreign state - an unprecedented decision. The elections are now likely to be rerun in March–April 2025. The unexpected success of far-right political forces has prompted pro-European parties to solidify their stance. PSD, PNL, USR, UDMR and MPs representing ethnic minorities (controlling 65% of parliament) have committed to forming a government and are discussing backing a common presidential candidate. For the incoming government, entering a clear fiscal consolidation path and implementing Recovery and Resilience Plan (RRP) reforms are expected to be top priorities.

While macroeconomists are often thought to have a “crystal ball,” we must admit that ours is cracked. Despite holding a positive long-term outlook anchored in EU values, with potential GDP growth estimated at 3% and inflation eventually converging toward the NBR’s target range of 1.5-3.5%, the outlook for 2025 remains blurred. GDP growth is projected to recover to 2.8% y/y in 2025 under a no-policy-change scenario, aided by statistical base and carry-over effects. However, the risks are clearly skewed to the downside. The extent of this downside will depend on the structure, size, and timing of fiscal consolidation, as policymakers now face a critical reckoning. On inflation, we are slightly more confident, forecasting 3.7% y/y by the end of 2025. Still, fiscal policy remains the primary source of idiosyncratic uncertainty. Post-elections, the NBR is expected to resume cutting rates mid-year. We project the NBR key rate to decrease by 75bp to 5.75% by the end of 2025. Amid persistent uncertainty, FX stability is likely to remain a cornerstone of the NBR’s policy response. We expect the EUR/RON exchange rate to remain stable until after the presidential elections, with some flexibility for mild RON depreciation thereafter, as the central bank has acknowledged competitiveness concerns. As the situation evolves, we are working to piece together a new “crystal ball.” We hope that by the start of the new year - with a new government in place and a reasonably credible 2025 budget bill - some of the current fog will begin to dissipate.