S&P affirms Romania rating, but risks remain to fiscal outlook

The decision is consistent with what can be regarded as a near-term baseline scenario in rating terms: that Romania will successfully form a government capable of adopting a credible budgetary framework for 2027-2028. However, the fluid political situation could threaten the reduction of the twin deficits – the country’s main rating vulnerability – and ultimately put the rating under pressure, the agency noted.

S&P’s baseline scenario may be interpreted strictly in the context of its rating framework, alongside its upside and downside scenarios, rather than as an indication of the agency’s assessment of the likelihood of particular political or economic developments. In this context, the negative outlook reflects elevated implementation risks surrounding the consolidation of Romania’s public finances and the narrowing of its external deficits. The agency therefore sees significant downside risks to the current rating if the fiscal and external adjustment fails to proceed as envisaged.

A prolonged government-formation process or failure to agree on a credible 2027-2028 budget framework may be expected to trigger sovereign rating reviews by all three major agencies in early 2027. 

The rating agency’s downside and upside scenarios also underline the importance of the 2027-2028 policy framework. On the downside, S&P warned that failure to implement a credible fiscal and policy path would jeopardise budgetary consolidation and could trigger broader pressures through deteriorating investor sentiment, higher funding costs and increased balance-of-payments pressures. The agency also said it could consider a downgrade if external pressures intensify.

Conversely, S&P sees scope for an improvement in the rating outlook if Romania succeeds in narrowing both its external and fiscal deficits, supported by a credible medium-term policy plan, potentially anchored by broad-based political consensus, alongside a rebound in economic growth.

The review came at a particularly volatile moment, both politically and economically, with risks stemming from domestic and external factors. S&P noted that Romania’s political landscape remains characterised by instability, while the lack of a functional government is undermining the predictability of reforms and clouding medium-term fiscal governance. The electoral cycle also creates additional fiscal risks, with S&P estimating that Romania’s fiscal deficits have historically widened by around 1.3% of GDP in election years.

S&P’s macroeconomic scenario is optimistic compared with consensus expectations.

The agency expects Romania’s economy to grow by 2.25% in 2027, driven by a recovery in consumption and a fading drag from fiscal consolidation, following an estimated 0.5% contraction in 2026. This compares with CFA Romania’s latest expectations, which, although not fully published, indicate growth of only around 0%-0.5% in 2027, according to information consulted by Economica.net.

CFA analysts have questioned what will drive growth once the substantial stimulus provided by the RRF in recent years fades. S&P expects a rebound in private-sector investment to partly offset a decline of around 2% of GDP in public investment as EU inflows taper off.

S&P’s fiscal scenario is consistent with the latest fiscal trajectory agreed by Romania and the European Commission under the Excessive Deficit Procedure (EDP). The agency expects fiscal consolidation through 2027-2028 to remain anchored by the EDP. It forecasts the ESA deficit narrowing from 7.9% of GDP in 2025, following 9.3% in 2024, to 6.25% this year, 5.8% in 2027 and 5.0% in 2028.

There is a direct correlation between S&P’s political baseline – under which Romania successfully forms a government that adopts a credible 2027-2028 budgetary framework – and its fiscal scenario. Again, however, this should be read in a rating context: S&P is effectively describing the fiscal path consistent with maintaining the current rating, rather than necessarily forecasting that these political and fiscal developments will occur.

The agency also provided an indication of how such consolidation could be achieved. S&P expects the 2027 fiscal effort to focus primarily on the expenditure side, through controlled increases in public wages and pensions following a two-year freeze. An agreed framework for social spending indexation could help facilitate political cooperation, the agency says. At the same time, given the requirements of the EDP, S&P sees limited room for wage or pension increases to significantly outpace nominal GDP growth in 2027-2028.

Romania’s external position is lagging behind the projected improvement in the fiscal balance, although S&P also pointed to positive factors such as the Neptun Deep offshore gas project.

S&P forecasts Romania’s current-account deficit at 7.5% of GDP in 2026, narrowing only marginally to 7.0% in 2027 and remaining around 1 percentage point of GDP above the fiscal deficit through 2029. The agency attributes part of the persistence of the external deficit to structural external factors rather than simply to domestic consumption, notably rising interest payments on a substantially larger external debt stock.

Although FDI and EU inflows are expected to finance around 50% of the current-account deficit on average in 2027-2029, S&P expects Romania’s external debt net of external liquid assets to rise from 52% of current-account receipts in 2025 to 60% by 2029. This leaves the external position as a significant vulnerability even as the fiscal deficit improves.