Investors give Romania more time to address fiscal imbalances as political risks subside

"A downgrade to junk is now less likely, but not impossible and will depend on medium-term fiscal plans," JP Morgan analysts said in a note to investors speaking of the outcome of the presidential elections in Romania.

The markets reacted positively to the win of pro-EU candidate Nicusor Dan, but the investors still expect the formation of a sound ruling majority (preferably with the participation of the Social Democratic Party – the largest in parliament) that would come up with a credible fiscal consolidation plan.

"In the best-case scenario, a government could be in place by mid-June, and a fiscal package could, in the best-case scenario, be approved by the end of June. No majority can be formed without the PSD, but it is not clear whether the party will formally be in one or support a minority government – ​​the latter option would be unstable," according to JP Morgan's note consulted by Profit.ro.

Despite the improved political outlook, JP Morgan expects Romania's currency to lose ground – some 5% during the entire year, under the baseline scenario. In real terms, this would mean a marginal depreciation after years of strengthening to a point where the analysts expect a correction.

JP Morgan revised its macroeconomic forecasts and now estimates a "moderate depreciation" of the local currency in Romania (leu), anticipating an exchange rate of RON 5.10 versus the euro by the end of the second quarter and RON 5.25 versus the euro by the end of the year.

The risk of a sharp depreciation is substantially reduced.

JP Morgan expects the National Bank of Romania (BNR) to resist currency depreciation and keep the exchange rate stable until a government is formed, but it will allow depreciation again afterward.

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