Romania Fiscal Outlook: Between a rock and a hard place

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.