Regardless of the outcome of the presidential elections in Romania, policymaking would become more fragmented, less stable, and less effective over the next few months, S&P Global told Reuters.

"(This) could lead to weaker growth, fiscal, and external outcomes than our already pessimistic assumptions," the rating agency said.

S&P Global said its post-election scenarios included an unstable minority government, which could attempt to advance with fiscal consolidation measures.

A decision to call early parliamentary elections would further delay budget cuts and pressure refinancing efforts, while a third scenario saw the formation of a unity government with sufficient backing for fiscal stabilisation.

Romania is on the edge of a downgrade to junk after years of wide public deficits.

S&P changed the outlook on Romania's sovereign rating to negative in January and pushing the country's debt out of the investment-grade category depends on a second fiscal corrective package that gained importance after the 2024 ESA public deficit was released by Eurostat at 9.3% of GDP – well above 8.6% calculated locally on cash base.

The S&P rating agency warned in January that it would lower Romania's rating – putting it in the junk region – if the public finance metrics deteriorate at a faster pace, under the effect of either slower economic growth or government policies. 

At that point, in January, S&P said that in the absence of further fiscal consolidation steps [on top of the end-December consolidation package], it expected a 7.5% public deficit in 2025 and slow fiscal consolidation to a 5.8%-of-GDP gap in 2028 with the debt-to-GDP ratio reaching 65.4% at the end of the four-year forecast period.

The 2.3%-of-GDP public gap in Q1 pushed up consensus expectations to a full-year deficit of over 9%, increasing the importance of a second fiscal consolidation package.

Separately, the European Commission expects a detailed budgetary plan for the seven-year fiscal consolidation under the Excessive Deficit Procedure. The outgoing cabinet has reportedly inked a plan that includes a 2pp VAT rate hike, higher dividend tax rate, and other elements of increased taxation.

iulian@romania-insider.com

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