S&P is the third of the three major rating companies that affirmed Romania’s sovereign rating (BBB-/negative) at the lowest investment-grade rating, giving the government time to settle the complicated fiscal slippage issue.

“Romania's complex political dynamics continue to obscure its future policy direction and the reliability of policy execution,” the rating agency said a couple of days before the December 6 general elections.

“A balanced and credible fiscal agenda will be crucial,” the rating agency’s press release reads indicating that such an agenda should go well beyond reversing recent one-off measures (like the 40% pension hike). Most of Romania's key budgetary allocations are structural and this inflicts further medium-term strain on an already rigid budget structure,” S&P’s analysts argued.

EU funds absorption will be key to aiding economic rebalancing, although implementation risks remain.

Romania's EU membership is “as an important policy anchor” that largely explains the rating agency’s confidence in Romanian economy’s rebalancing.

Romania will be a strong beneficiary of the structural funds designated under the EU's upcoming Multiannual Framework, alongside the newly created EU Recovery and Resilience Fund (RFF). The grants portion alone under the RFF equals about 6% of Romanian 2019 GDP, and a similar amount in loans is available to unlock access to cheap financing. Should the funds be fully deployed and successfully absorbed, it would help sustain Romania's growth prospects, facilitating the budgetary rebalancing that S&P envisions in its base case for 2021-2023, S&P rating agency reasons.

Under its base-case scenario, S&P expects that the incoming government will take firm steps toward viable fiscal consolidation during its term.

The rating agency says it could lower its ratings on Romania if fiscal and external imbalances remain elevated “for longer than we currently anticipate”, for instance, because of challenges to fiscal policy design after the upcoming elections.

The agency anticipates a 2pp correction in Romania’s budget deficit, from 9.2% of GDP this year to 7.2% of GDP in 2021, in line with the plan outlined by incumbent Liberal Finance Minister Florin Citu who expects to remain in office backed by a robust majority in parliament after the December 6 elections. The rating agency further anticipates gradual fiscal consolidation to 4% of GDP in 2023. As regards the current account deficit, S&P expects the slight narrowing this year to 4.5% of GDP (from 4.7% of GDP in 2019) to reverse in 2021 resulting in a CA gap of around 5.1% of GDP over the coming years. 

S&P projects that Romania's economy will contract by 5.2% in 2020 before rebounding by 4% in 2021.