Romania's attempts to restore investor confidence and lower the European Union's highest budget deficit have hit early hurdles in a year fraught with political jeopardy and the risk of losing its coveted investment-grade ratings.
The re-run of the presidential election, due in May, after December's vote was annulled over accusations of Russian interference, makes it harder to craft a credible plan to lower its deficit to 7% of economic output.
The country plans to raise 13 billion euros ($13.64 billion) via international bonds this year, among the highest in emerging markets.
However, S&P could cut its rating outlook to negative on Friday, following a similar move by Fitch last month. Both agencies, as well as Moody's, already have Romania on their lowest investment grade.
Losing an investment-grade rating - thus becoming a "fallen angel" - could increase borrowing costs. A 2016 World Bank study found that being cut to "junk" by at least two major ratings agencies increases a country's short-term borrowing costs by almost 200 basis points on average.
While Romania's debt is well below average EU levels, the country has notched up the bloc's fastest rise in borrowing since 2019.
"We (are) already seeing deterioration from the investor's pricing perspective," Yerlan Syzdykov, global head of emerging markets at Amundi, said of the rating risks.
So the clock is ticking for Bucharest.
Finance Minister Barna Tanczos told Reuters last week he hoped deficit reduction measures and public sector cost cuts proposed in the government's 2025 budget would restore the country's fiscal credibility.
Romania also aims to lower its deficit to 2.5% by 2031, a plan Brussels approved this week.
It is waiting to issue bonds until it sends to parliament a 2025 budget that aims to reduce the deficit, but without major tax hikes that, while unpopular and potentially politically unappealing in the run up to a vote, are nonetheless seen by investors, analysts and ratings agencies as the easiest fix, given Romania has the second-lowest tax-to-GDP ratio in EU.
"It was the hangover from the presidential election mess late last year and the lack of approved budget for 2025 which I think prevented them coming to the market early," said Viktor Szabo, portfolio manager at abrdn.
Romania's 10-year government bond yields surged by 74 basis points to two-year-highs just above 8% earlier this month, well above Hungary, the region's second-highest at 6.9%.
Four elections last year pushed the budget deficit to 8.6% of economic output. Many expected the government to curtail it once the dust settled, but the presidential re-run threw that into doubt. Moscow has denied any interference in the vote.
Romanian debt agency chief Stefan Nanu said the country "must deliver" on that 2031 plan, which would sustain economic growth while also tackling the deficit.
Nanu said Romania could also access at least 4 billion euros from international financial institutions and EU recovery funds, as well as 40-45 billion lei ($17.94 billion) from domestic retail bonds.
But Romanian officials have made contradictory comments on whether tax hikes are needed, and none are expected before May's election. Any weakening of social stability could make pushing through the required cuts even more difficult.
S&P's impending review could be another blow.
"Fiscal dominance has emerged as a dominant theme in emerging markets and in developed markets," Mikhail Volodchenko, AXA Portfolio Manager, said. "Wherever doesn't show signs of pressure from investors to consolidate, they will be punished."
($1 = 0.9530 euros)
($1 = 4.7380 lei)
