Romania fiscal outlook: Between a rock and a hard place
CEE Economies Special Report , 4. Feb.
Romania ended 2024 with a budget deficit of 8.7% of GDP, likely one of the largest in the EU. By the latter half of the year, markets had largely priced in this deficit. The general expectation was that 2025 - following the heavy election cycle - would mark the start of much-needed fiscal consolidation under the seven-year plan agreed upon with the European Commission. However, political instability disrupted these expectations, triggering a significant repricing at the end of 2024. In response, rating agencies acted swiftly, with two out of three changing Romania’s credit rating outlook to negative. The rescheduling of the presidential elections to May is expected to dampen reform appetite in the first half of 2025. The initial budget target for 2025 aims for a deficit of 7.0% of GDP, implying a fiscal consolidation of around 1.7pp. The government already implemented measures to curb public spending and increase revenues in late 2024, with an estimated impact of approximately 2pp of GDP.
Considering the structure of the budget and the full implementation of public pension recalculations this year, achieving the 2025 target appears somewhat ambitious. Additional fiscal consolidation measures of around 0.8pp may be necessary. Budget revenues are projected to rise by about 2.3pp of GDP in 2025, with improved tax collection contributing roughly 0.5pp. Given these factors, the 7% deficit target seems optimistic. After the presidential elections, the government will likely explore further fiscal measures, balancing revenue increases with expenditure controls, while also aiming to support economic growth. Gross funding needs for 2025 are estimated at approximately RON 235bn, with net issuance expected to account for about half, of which around 60% likely to be financed domestically. Our models indicate that the fair value of 10-year ROMGBs is currently below market levels, suggesting that political uncertainty and rating adjustments may have led to an overreaction. That said, for a market rally to materialize, positive developments will be needed—the first potential catalyst being the unlocking of the Recovery and Resilience Plan (RRP). A rating downgrade to “junk” is possible, but not our baseline currently. The patience of both investors and rating agencies has been tested in recent years.
Considering the structure of the budget and the full implementation of public pension recalculations this year, achieving the 2025 target appears somewhat ambitious. Additional fiscal consolidation measures of around 0.8pp may be necessary. Budget revenues are projected to rise by about 2.3pp of GDP in 2025, with improved tax collection contributing roughly 0.5pp. Given these factors, the 7% deficit target seems optimistic. After the presidential elections, the government will likely explore further fiscal measures, balancing revenue increases with expenditure controls, while also aiming to support economic growth. Gross funding needs for 2025 are estimated at approximately RON 235bn, with net issuance expected to account for about half, of which around 60% likely to be financed domestically. Our models indicate that the fair value of 10-year ROMGBs is currently below market levels, suggesting that political uncertainty and rating adjustments may have led to an overreaction. That said, for a market rally to materialize, positive developments will be needed—the first potential catalyst being the unlocking of the Recovery and Resilience Plan (RRP). A rating downgrade to “junk” is possible, but not our baseline currently. The patience of both investors and rating agencies has been tested in recent years.