The election of Bucharest mayor Nicușor Dan as Romania's next president will likely pave the way for a new government to address the fiscal risks, although challenges remain "substantial," S&P Global Ratings said, quoted by Bloomberg and Economedia.ro.

"Markets will want to see how quickly the new government is formed and how credible its fiscal consolidation plans are," S&P told Bloomberg News. 

The key will be how Romania manages its budget and current account deficits "against a backdrop of fragmented policy and weak economic growth."

Romania has managed to finance its twin high deficits with capital inflows, including the issuance of Eurobonds, European Union funds, and foreign investment, S&P said. 

"Possible delays in a policy response could, however, undermine some external financing sources," the rating agency added. 

S&P thus warns that it could reduce the credit score if deficits increase more than expected "over the medium term" due to political actions and slower economic growth.

"In our opinion, this would lead to a sharper increase in public debt and interest burden while also weighing on Romania's substantial current account deficits," it said.

The rating agency signaled earlier this month that Romania could lose its investment grade if political turmoil persists, warning that the country's prospects appear riskier than the negative outlook on the country's BBB- sovereign rating implies.

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.

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.

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.

iulian@romania-insider.com

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