Romania: 3 main themes for 2025

• Challenging fiscal consolidation targets 7%-of-GDP deficit
• Controversial re-run of presidential election with unclear outcome
• Inflation reignition may delay monetary easing more

Romania deals with severely high twin deficits (close to 8% of GDP in the current account and probably more than 8% of GDP - general government). The country is under the EU's EDP since 2020 but failed to reduce the fiscal gap, which now accounts for more than 80% of the CA deficit, according to central bank calculations. Feeble attempts to fiscal consolidate did not work out in the past couple of years, given politicians' unwillingness to implement unpopular measures before elections. All elections should have been over in 2024, but the Constitutional Court decided to cancel the presidential election in the context of an allegedly rigged electoral process and illegalities in the presidential campaign of the first-round winner. Despite the unexpected extension of election mood, the government approved a set of fiscal measures meant to reduce the deficit, that will very likely hinder economic growth, reignite inflation and make the central bank's intention to monetary ease, tougher.

Fiscal consolidation package to hamper growth while refuelling inflation

The government approved at end-2024, for the third consecutive year, an emergency ordinance comprising a set of fiscal measures meant to reduce the deficit. It implemented the fiscal reform commitments in the National Recovery and Resilience Plan and EU recommendations under the EDP. Measures are estimated to have about 0.4%-of-GDP net fiscal impact, but the government committed to make 1%-of-GDP additional savings with administration spending.

Measures consist in elimination or reduction of tax breaks, introducing a new tax on special construction, freezing social and personnel spending in 2025 and making the central administration smaller by reducing the number of top dignitaries and merging regulators and watchdogs. Obviously, those measures will have a negative impact on the economic activity and consumption, hampering growth even more. Tax adjustments will likely lead to inflation speeding, a trend that already started at the end of last year.

Presidential election re-run with unclear outcome

Far-right independent candidate Calin Georgescu surprisingly won the first round of Romania's presidential election, with nearly 23%, on Nov 24, 2024. He was followed by opposition leader USR's Elena Lasconi, who mustered more than 19%. The Constitutional Court cancelled the election after intelligence services submitted reports indicating that the electoral process was rigged and the election campaign of Georgescu - illegal. Prosecutors started several investigations that should prove this, although we doubt they could do it before the rescheduled election. The government is expected to approve a new election date, possibly at end-March.

It is uncertain whether Georgescu will be allowed to run again, but if not, another nationalist will likely take his place and voter support. There are two nationalist parties, SOS Romania and the AUR, which had candidates in the presidential election. SOS Romania's Diana Sosoaca was expelled from the race due to far-right comments, while AUR leader George Simion made it to the fourth place with more than 13% of votes. On the other side, the independent Bucharest Mayor Nicusor Dan said he would run, USR will keep Lasconi as candidate and the ruling alliance (PSD, PNL, UDMR and the minorities group) might back a former PNL leader, Crin Antonescu. There haven't been any polls yet on the announced or potential candidates, but we think that the run-off will be a race between a nationalist and a pro-EU candidate.

Delayed monetary easing to suspend economic recovery

The central bank cut the policy rate by 25bps twice last summer, to 6.5%, taking advantage of what it-seemed-to-be a consolidated inflation moderation trend. The wide deficit, heavy public spending, relaxed fiscal policy and high uncertainties on the political front made the monetary institution hold on to the rate at the same level by the end of last year, despite a weaker-than-expected economic performance. Inflation resumed accelerating in the last months of 2024, due to an unexpected growth pick-up of food prices and resilient demand for some non-foods and services.

The government stopped the fiscal easing as of 2025, but second-round effects or price growth are expected in H1 2025. In addition, the fiscal package makes tax adjustment that may push some prices up while contracting the economic activity. We see high risks of stagflation in 2025, especially if non-inflationary EU funding continues to lag due to sluggish reforms. If the government fails to achieve a convincing fiscal consolidation, it might be forced to apply more tightening at the mid-year budget revision. Therefore, key rate cuts are very likely to be postponed more, even with sacrificing economic rebound for a while.