Romania - back on track after a high-stakes election

The Romania presidential race run-off on 18th May saw pro-EU centrist candidate Nicușor Dan win, achieving 54% of the vote. This run-off saw a larger turnout of 65% (versus 50% in the first round), which aided Dan, while in addition, the diaspora vote was more balanced (45% in favour of Dan versus 55% for ultranationalist George Simion). The result saw a large swing in favour of Dan from Simion, who had a commanding lead of 20% in the first round.

While that was our base case before the first round, those results were a shock, especially as the government resigned. High political uncertainty driven by lower purchasing power and geopolitical risk needs full attention. Following yesterday’s result, we are pleased to have been right, after all.

The recovery of risk assets

Romania risk assets rebounded on the outcome of a Dan presidential victory, with EUR front-end bonds 45bps tighter and longer-end bonds 30bps tighter. Local markets, which are more liquidity sensitive, have seen yields drop 60-80bps and Romanian FX 2% stronger.

In terms of the outlook for Romania, we would expect a government to be appointed quickly, at the first attempt, and most likely this will be a coalition of the National Liberal Party (PNL), a pro-EU liberal opposition party (USR), and the ethnic Hungarian minority party (UDMR), and may include the Social Democratic Party (PSD). Dan is the initial founder of the USR party and has pushed a message of fiscal governance and EU alignment.

In his campaign, he indicated the structure of the proposed government he would like to see, which includes Ilie Bolojan as prime minister from the PNL. This government would be stronger than the previous government in terms of offering a reform and fiscal tightening agenda. We would look for fiscal tightening measures to increase revenue collection, such as VAT and personal income tax hikes.

The budget deficit is expected to be 8.5% of GDP with unchanged policies, and so fiscal tightening measures of approximately 2% would be needed to reach the 7-7.5% target of the European Commission (EC).

Furthermore, the EC will give a recommendation in early June on Romania missing its fiscal target for 2024 under the excessive deficit procedure. It is very likely to recommend a suspension or restriction of EU funds in order to send a political message and to keep pressure on the new government. The EC will provide a judgement in July on the back of the recommendation, however EU funds suspension is not at risk, and we expect Romania to continue to access funding through the resilience and recovery funds (RRF) programme and through cohesion/structural funds.

A pause for rating agencies

Rating agencies are also expecting a consolidation in the budget to the EC target range for 2025. We expect that rating agencies would wait in order to assess the proposed fiscal plans of the new government before passing judgement on any rating action. Rating agencies have scheduled reviews as follows this year: August – Fitch, September – Moodys, and October – S&P. The market had been fearful of rating downgrades by multiple agencies, however we think the downgrade risk will reduce now with a Dan presidency, on the formation of a new government, and a rigorous fiscal adjustment plan with EU funds continued accessibility.

We saw fiscal slippage into the elections in December last year, and so far, this year has been higher than we estimated, and wage increases along with inflation-linked pension payments have grown more substantially and certainly require reforms.

We need to consider the evolution of budgetary performance once the new budget is announced to see if it is having the desired effect for 2025, as we have only six months of the year remaining. Romania hard currency bonds have been trading at sub-IG spreads for some time now, however if we see stronger positive trends in the budgetary data in 2025 (post the new government), we expect that the rating agencies may look more favourably towards Romania by delaying any negative rating action.

Our investment view

Given our outlook, we continue to favour Romania euro bonds, which we believe trade at discounted valuation while offering a decent carry profile. Importantly, the access to European funding through grants and loans of the next generation RRF have been, and continue to be, a very useful low-cost funding source for the sovereign. This is at the same time as providing conditionality for economic and social reforms, which are key for longer-term sustainability and competitiveness.

^{All data sourced from Bloomberg or publicly available sources, as at May 2025.}