The Economic Storm Is Approaching! Financial Analysts' Outlook as the European Council Puts Pressure on Romania

 The projected state budget deficit for 2025 has increased to an average forecast of 7.3% of GDP, while economic growth expectations are set at an average of 1.3%, according to estimates by the CFA Romania Association. Public debt, calculated as a percentage of GDP, is anticipated to rise to 57% over the next 12 months. The forecasted inflation rate for the 12-month horizon (January 2026) stands at an average of 5.02%.

The Council recommends that Romania ends its excessive deficit situation by 2030. Romania should ensure that the nominal growth rate of net expenditures does not exceed 5.1% in 2025, 4.9% in 2026, 4.7% in 2027, 4.3% in 2028, 4.2% in 2029, and 3.9% in 2030.

Regarding the EUR/RON exchange rate, over 85% of participants anticipate a depreciation of the leu over the next 12 months. The average six-month forecast is 5.0404 lei per euro, while the 12-month forecast average is 5.0886 lei per euro.

"Although the macroeconomic confidence indicator corrected itself in December after a sharp decline in the previous month, it remains at an extremely low level amid heightened uncertainty about the evolution of the Romanian economy. It is also worth noting the continued reduction in economic growth expectations for 2025 and the increase in budget deficit forecasts," said Adrian Codirlașu, President of CFA Romania, in a statement sent to AGERPRES on Thursday.

The Macroeconomic Confidence Indicator of the Association rose by 6.7 points in December to a value of 38.1 points. According to the source, this improvement was due to increases in both of its components. The expectations component rose by 7.5 points to 30.8 points, while the current conditions component increased by 4.9 points to 52.7 points.

Regarding the evolution of residential property prices in cities, 39% of participants anticipate stagnation over the next 12 months, while 32% expect an increase, and 29% predict a decrease. Furthermore, 68% of participants believe that current prices are overvalued, while 29% consider them to be fairly valued.

The survey has been conducted monthly by the CFA Romania Association for over 13 years and serves as an indicator that aims to quantify financial analysts' expectations regarding Romania's economic activity over a one-year horizon. It is conducted in the last week of each month, and participants include CFA Romania members and candidates for Levels II and III of the CFA exam.

The Macroeconomic Confidence Indicator ranges from 0 (no confidence) to 100 (full confidence in the Romanian economy) and is calculated based on six questions regarding current conditions—related to the business environment and labor market—and one-year expectations for the business environment, labor market, personal income trends at the economy level, and personal wealth trends at the economy level.

In addition to the questions necessary for calculating the Macroeconomic Confidence Indicator, the survey evaluates one-year expectations for inflation rates, interest rates, the EUR/RON exchange rate, the BET stock index, and global macroeconomic conditions.

The CFA Romania Association is the organization of investment professionals in Romania who hold the Chartered Financial Analyst (CFA) designation, a qualification administered by the CFA Institute (USA). Currently, the CFA Romania Association has over 250 members holding the CFA designation. Established in 2000, is a professional, non-governmental organization that unites investment professionals across various sectors, including banking, asset management, insurance, private equity, and pension funds. As a member of the global CFA Institute network, the society is dedicated to promoting the highest standards of ethics, education, and professional excellence in Romania's investment industry.

Reuters issues an economic warning: Romania risks being downgraded to junk status!

The political crisis is throwing Romania into turmoil. Romania's attempts to restore investor confidence and reduce the European Union's largest budget deficit have faced obstacles, increasing the risk of losing its coveted "investment-grade" country rating, Reuters reports. The repeat of presidential elections in May, after December’s vote was annulled due to allegations of Russian interference, makes it harder to draft a credible plan to cut the deficit to 7% of GDP.

The country plans to raise €13 billion this year through international bonds, one of the largest amounts in emerging markets. However, S&P could lower the rating outlook to negative on Friday, following a similar move by Fitch last month. Both agencies, along with Moody's, have already placed Romania at the lowest investment grade.

Losing the investment-grade rating – the so-called "fallen angel" status – could increase borrowing costs. A 2016 World Bank study showed that a downgrade to "junk" by at least two major rating agencies raises a country's short-term borrowing costs by nearly 200 basis points on average.

Although Romania's debt is well below the EU average, the country has experienced the fastest debt growth in the bloc since 2019.

"We are already seeing a deterioration from investors' perspective," said Yerlan Syzdykov, head of emerging markets at Amundi, referring to rating risks. Thus, the clock is ticking for Bucharest, notes Reuters.

Finance Minister Barna Tanczos told Reuters last week that he hopes the deficit-cutting measures and public sector cost reductions proposed in the government's 2025 budget will restore the country's fiscal credibility. Romania also aims to reduce its deficit to 2.5% by 2031, a plan approved by Brussels this week. The country is expected to issue bonds before submitting the 2025 budget to parliament, which targets deficit reduction without major tax increases. While unpopular and politically unattractive before elections, such measures are seen by investors, analysts, and rating agencies as the easiest solution, given that Romania has the second-lowest tax-to-GDP ratio in the EU.

Romania missed the opportunity to issue bonds earlier – before market volatility following the inauguration of U.S. President Donald Trump – and is already facing higher costs, with budget approval likely delayed until February.

"I think the aftermath of last year’s presidential election disaster and the lack of an approved 2025 budget prevented them from coming to market earlier," said Viktor Szabo, portfolio manager at abrdn.

Earlier this month, yields on Romania's 10-year government bonds rose by 74 basis points, reaching a two-year high of just over 8%, far exceeding Hungary, which has the second-highest yield in the region at 6.9%.

Last year, four rounds of elections pushed the budget deficit to 8.6% of GDP. Many expected the government to reduce the deficit after the dust settled, but the repeat of presidential elections has cast doubt on this.

Moscow has denied any interference in the vote.

Romania's public debt chief, Ştefan Nanu, said the country "must stick to" the 2031 target plan, which would support economic growth while tackling the deficit. Nanu stated that Romania could also tap at least €4 billion from international financial institutions and EU recovery funds, as well as 40-45 billion lei ($17.94 billion) from domestic retail bonds.

However, Romanian officials have made conflicting statements about the need for tax increases, with none expected before May’s elections. Any weakening of social stability could make it even harder to implement necessary cuts.

The imminent S&P review could deliver another blow. "Fiscal dominance has emerged as a prevalent theme in both emerging and developed markets," said Mikhail Volodchenko, portfolio manager at AXA. "Wherever investors show no signs of pressure for consolidation, they will be punished," the expert warns.

S&P Agency Downgrades Romania's Rating Outlook from Stable to Negative / Reaction from the Minister of Finance

The financial evaluation agency S&P has downgraded Romania's rating outlook from stable to negative and confirmed the rating at "BBB-", the last tier in the investment-grade category, during an additional evaluation conducted at the beginning of the year, outside the usual biannual assessments for sovereign issuers in spring and autumn, reports Profit.ro.

The Minister of Finance, Tanczos Barna, stated that S&P sent a clear message that measures to reduce the budget deficit, a prudent budget, and a leaner state are needed. He also noted that the agency has not changed the country's credit rating, and Romania remains recommended to investors.

"The change in outlook from stable to negative is a very clear signal from the S&P rating agency: we need measures to reduce the budget deficit, a prudent budget, and a leaner state to restore fiscal balance and strengthen the country's financial credibility. With the evaluation announced this evening, S&P has not changed Romania's credit rating. Romania remains recommended to investors as a safe destination," said Minister of Finance Tanczos Barna on Friday evening after S&P downgraded Romania's rating outlook from stable to negative and confirmed the rating at "BBB-".

According to the minister, "The government's decisions to reduce the budget deficit and consolidate economic growth must be implemented swiftly, in the form already agreed upon with our European partners."

"The 2025 budget, which will be presented to the Government and submitted to Parliament for approval in the coming days, reinforces this prudent vision of managing public finances. The necessary measures to reduce the deficit must be understood and respected by the leaders of all public institutions, state-owned companies, union leaders, every mayor and county council president, as well as every local and county councilor," the Minister of Finance added.

Tanczos Barna emphasized that "neither cost-cutting measures nor reforms to eliminate structural deficiencies in the economy can be delayed, as each day we apply these measures brings us closer to the agreed deficit target."

"ANAF (the National Agency for Fiscal Administration) and the Romanian Customs Authority have embarked on the path of digitalization and institutional capacity building, and they are therefore obligated to increase the collection rate of taxes and duties. As confirmed by our partners in Brussels this week, we can rely on a robust economy and steady growth, which will be supported in 2025 through massive public investments," the Minister of Finance concluded.