S&P says Romania's inflation will pose a challenge to central bank

International rating agency S&P affirmed Romania's BBB-/stable sovereign rating on April 12, citing the robust growth outlook and the moderate stock of external and government debt balanced against the country's twin deficits. The inflation outlook poses a challenge for the central bank, S&P also said.

S&P expects the Romanian government's pro-cyclical fiscal policy to help stimulate domestic demand, and it projects real growth of around 3% this year.

Rising fiscal transfers - in the form of higher pensions, wages, and social transfers - will bolster consumption, in addition to robust growth in real wages, outweighing the sluggish external demand from the eurozone and, specifically, Germany, an important export destination for Romania.

In addition to strong private consumption, the rating agency anticipates that EU-funded investment will underpin growth. EU-funded investment supports S&P's expectations for substantial growth of about 3.6% on average between 2025 and 2027.

The Romanian government's pro-cyclical fiscal policy comes at a cost: a fiscal deficit of nearly 6% of GDP this year and inflation risking to become more persistent over the next several months.

The inflation outlook poses a challenge for the central bank, the rating agency warns. S&P expects the annual average HICP inflation to ease at 5.9% in 2024 from 9.7% in 2023 and further decline to 4.8% y/y in 2025.

Fiscal policy post-elections is uncertain, and the rating agency assumes deficits will narrow only gradually over the next years, averaging 5.1% of GDP in 2025-2027 – under the baseline scenario.

Further fiscal adjustments would be required to reach the 3%-of-GDP deficit target stipulated by the excessive deficit procedure (EDP) and the Resilience Facility framework by 2027.

S&P expects such adjustments to likely target additional tax revenue, such as VAT.

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