International rating agency S&P on April 3 affirmed Romania’s BBB- sovereign rating, but also its negative outlook, sketching a scenario of steady medium-term fiscal consolidation for this year and beyond – which would keep the growth rate subdued this year (0.25%) but correct the external deficit in the coming years. Nevertheless, S&P warned of the social impact of the consolidation policies, aggravated by unexpected inflation caused by the Middle East conflict, prompting tensions within the four-party ruling coalition. It also expressed concerns related to the lack of follow-up measures to continue fiscal consolidation in 2027.

As regards the fiscal consolidation path, S&P expects the government coalition to make progress toward implementing its planned fiscal measures to bring the general government deficit to 6.5% of GDP in 2026 and 5.5% of GDP in 2027 compared with 9.4% of GDP in 2024. 

S&P projected a deficit of 4.3% of GDP for 2029 – 1.1 percentage points (pp) more than the 3.2% envisaged by the government under the medium-term fiscal strategy passed along with the 2026 budget. 

The 4.3% of GDP gap would still meet the EU’s expectations under the Excessive Deficit Procedure (EDP). However, S&P warned that challenges remain in the medium term, and fiscal discipline will be of the essence.

The rating agency argued that measures to secure this year’s consolidation are already enacted – although it admitted implementation risks remain, stemming from potential legal challenges to budget enactment and persistent vulnerabilities related to tax collection efficiency and the reliance on successful administrative reforms.

However, the authorities have yet to specify fiscal measures beyond 2026, S&P stressed. Furthermore, the government should secure further consolidation under the EDP with an annual decrease of the deficit by 0.8-0.9 percentage points. 

In this context, S&P stressed that improving the government's tax collection abilities, including by closing the VAT gap and improving the tax administration's efficiency,  is a key enabler to the fiscal consolidation agenda. At the same time, a timely flow of EU funds is essential for government capital expenditure.

S&P expects Romania’s public net debt-to-GDP ratio to keep rising, although at a slower pace, in the coming years – by 3.2 percentage points this year (to 60.4%), but only 1.8pp in 2027, 1.4pp in 2028, and 1.3pp in 2029. 

The fiscal consolidation is expected to generate improvements in the external balance, which remains deep in the deficit area. The current account (CA) deficit narrowed modestly to 8.0% of GDP in 2025, but it is seen as shrinking by 1pp in 2026 and 2027 each, visibly positively impacted by gradually smaller public deficits.

However, S&P expects the external financing mix to benefit from rising EU fund inflows over the next few years, following a temporary dip in 2024. Overall, nondebt-creating inflows of EU investment grants and foreign direct investment could cover 50%-60% of current account deficits on average, supporting the central bank's strong reserve position.

Romania's finance minister Alexandru Nazare said Romania could hope for a neutral outlook from major rating agencies this autumn, pending budget execution. However, this is unlikely before more clarity emerges about the impact of the prime ministership transfer from the Liberals (PNL) to the Social Democrats (PSD). S&P's scenario assumes a smooth transfer, but the rating agency expects political cohesion and overall stability to become more concretely contested before the next parliamentary elections in late 2028.

iulian@romania-insider.com

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