Romania’s fiscal consolidation plan will help government achieve its deficit targets of 7.5% this year and 6.4% in 2026 from the record 8.7% of GDP in 2024 (cash terms) and will moderate the current account (CA) deficit from 8.3% of GDP in 2024 to 7.5-8.0% in 2025 and 6.5-7.0% in 2026 – at the cost of meagre 0.3% GDP growth this year to strengthen at 1.7% in 2026.
The ING financial group’s analysts note political and administrative implementation risks, as well as economic risks such as a sudden plunge in consumption or investments, prompting a technical recession.
Rating-wise, the new package has likely eased sovereign downgrade concerns, but execution will be key – any slippage could reignite downgrade fears, the ING report concludes.
For now, the financial group’s analysts trust the fiscal package has bought Romania some goodwill with investors and rating officials, and believe that a revision of the outlook to stable might not be completely off the table even for this year under an optimistic scenario. However, maintaining investment-grade status is crucial for Romania to keep financing costs under control, especially given its still-large financing needs, they warn.
After accounting for likely second-round effects (such as slightly lower tax revenues due to slower growth), ING maintained its previous estimates of a 7.5%-of-GDP deficit in 2025 and 6.4% in 2026.
Regarding the CA balance, ING analysts believe the fiscal tightening may help narrow the external deficit slightly, in the short term, by cooling import demand. However, they think that improvements are likely to be relatively modest, projecting the current account deficit in the 7.5-8.0% of GDP range in 2025, easing toward perhaps 6.5-7.0% by 2026.
But the fiscal squeeze comes at a time when Romania’s economy is already losing momentum (0.8% growth in 2024 and 0.3% y/y advance in Q1 this year) and the new measures are likely to dampen demand throughout the year, ING argues. Private consumption looks set to sputter as higher taxes (especially VAT) cut into disposable incomes and as public sector employees face wage freezes and lower bonuses and allowances. Investments financed from the national and local budgets may also take a hit.
Looking ahead, a mild recovery is expected in 2026, but the rebound will be constrained. ING analysts estimate GDP growth of 1.7% in 2026, along a subdued trajectory reflecting the lagged impact of fiscal consolidation (some measures, such as pension and wage freezes, higher dividend taxes, and increased property taxes, come into effect in 2026), as well as generally weaker domestic demand. Some support should come from EU-funded investments and a better external environment.
Inflation is another side-effect of the fiscal package, but ING expects the spike prompted by the VAT rate hike in August to be transitory.
By late 2025 and into 2026, inflation should resume a downward path. Base effects will kick in mid-2026, and softer aggregate demand will also dampen underlying price pressures.
The BNR’s inflation target (2.5% ±1) remains far off, but by the end of 2026, inflation could fall close to 4.0%, according to ING projections. However, policymakers will need to keep expectations anchored through this volatile period.
iulian@romania-insider.com
(Photo source: Andreea Constantinescu/Dreamstime.com)
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