Allianz Trade anticipates 3.1 pct economic growth for Romania in 2025

Analysts of credit insurer Allianz Trade expect Romanian economy to grow by 3.1% in 2025 and 3.6% in 2026, respectively, on the back of resilient public investment, the rebounding domestic consumption and the gradual easing of monetary policy."Although the National Bank of Romania (BNR) aims to maintain inflation at a stable level (2.5% ? 1 pp), the monetary policy has been relaxed for a long time. The real interest rate was negative between 2017 and October 2023, and inflation was into double-digits between 2022 and 2023, largely due to rising energy prices. The National Bank of Romania increased the key interest rate from 1.25% in September 2021 to 7.00% in January 2023, in order to control price increases. Then, in July 2024, it began to gradually reduce the benchmark interest rate which now stands at 6.5%. The central bank has also frequently intervened in the foreign exchange markets to maintain the stability of the RON/EUR exchange rate, a strategy that will continue as long as the banking authority has sufficient foreign exchange reserves," reveals the 2025 Country Risk Atlas by Allianz Trade released on Tuesday.Regarding inflation, the report shows that it will remain more persistent than in neighboring economies, being supported by strong wage increases, food price hikes and loose fiscal policies. After hitting 5.6% in 2024, inflation is forecast to decrease to 4.5% in 2025 and 3.4% in 2026.According to analysts, in Romania, the public finance situation continues to deteriorate, becoming a cause for concern. The strong pro-cyclical fiscal stimulus has already widened the budget deficit to 4.3% of GDP in 2019, and this imbalance advanced significantly in 2020 (9.3%) and 2021 (7.2%), amid economic support measures required by the Covid-19 pandemic."Despite some planned fiscal consolidation, the annual deficits are forecast to remain high at more than -5% of GDP in 2024-2026. Meanwhile, the public debt-to-GDP ratio increased from 35% of GDP in 2019 to 49% in 2023 and is forecast to exceed 50% in 2024-2026. While this still appears moderate compared to other EU countries, the trend dynamics are a reason to worry. Although fiscal consolidation measures are planned, the deficit is estimated to remain above 5% of GDP in the period 2024-2026. In parallel, public debt increased from 35% of GDP in 2019 to 49% in 2023, and estimates indicate exceeding the 50% threshold in the period 2024-2026," the cited experts argue.Romania's external finances are another cause for concern. The annual current account deficit widened steadily from -0.3% of GDP in 2014 to -9.3% in 2022 and has remained high at over -7% in 2023-2024. Crucially, only some 30% of the combined shortfall in the last two years was financed through net foreign direct investment (FDI) inflows, well below the comfortable level of 75% and down from a recent high of 168%, the document notes.Exports and imports are expected to grow at similar rates in 2025-2026, so annual current account deficits should remain large at above -6% of GDP in this period. The net FDI coverage of the deficits is likely to remain below 50% as capital flows to (weaker) emerging markets will remain muted amid ongoing global economic headwinds. Combined with the projected high fiscal deficits, this could raise external financing needs to critical levels.On the other hand, the BNR's foreign exchange reserves have recovered again from temporary lows in 2022, although the aforementioned exchange-rate interventions cause some volatility in the level. At USD 70 bn in August 2024, reserves covered about five months of imports, which is considered an adequate ratio. However, they do not fully cover external debt payments due in the next 12 months, standing below the comfort threshold of 125%, Allianz Trade analysts caution.Regarding Romania's business environment, the report notes that it is generally favorable, although certain vulnerabilities persist. The World Bank Institute's annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are generally business-friendly while weaknesses remain with regard to perceived corruption. The Heritage Foundation's Index of Economic Freedom survey 2024 assigns Romania rank 51 out more than 180 economies, reflecting strong scores with regard to property rights, tax burden, trade freedom and investment freedom. However, weaknesses remain in the areas of government integrity and financial freedom, the document states."At micro level, local companies are facing pressure due to the high cost of credit and the slowdown in domestic consumption, while exports are failing to compensate for this decline. In this context, it is no surprise that the number of insolvencies increased significantly last year, by almost +10%, as a natural consequence of the deterioration of financial indicators, especially liquidity. The most exposed sectors remain construction, especially the residential segment, and wholesale and retail trade, where shrinking profit margins, cash flow constraints and payment delays are putting major pressure on the stability of firms. Despite these challenges, the current problems are still manageable, provided that measures to reduce the budget deficit are implemented and favorable base effects, such as a good agricultural year, are in place. However, a possible downgrade of the country's rating in the second quarter, also linked to the results of the May elections, could have a much more severe impact on the cost of financing and interest rates, amplifying economic risks for Romania," said Mihai Chipirliu Allianz Trade CFA - Risk Director as cited in a release.According to the Allianz Trade Environmental Sustainability Index, Romania ranks 54th out of 210 economies, with good results in energy efficiency, CO2 emissions per GDP and water stress. However, vulnerabilities persist in renewable energy production, recycling rate and the capacity to adapt to climate risks.Regarding Romania's systemic political risk, it is considered moderate, but political volatility is high, and political uncertainty affects the fiscal consolidation outlooks. In December 2024, the Constitutional Court annulled the presidential election following accusations of external interference, leading to new elections being scheduled in the spring of 2025. Although a new pro-European four-party government has been formed, its stability remains uncertain, the survey remarks.Produced by Allianz Trade, a global leader in trade credit insurance and credit management, the Country Risk Atlas provides a detailed analysis of the economic, political and business environment, as well as sustainability factors that influence the risk of default for companies in 83 economies. The analysis is based on a proprietary risk rating model, updated quarterly with the latest economic developments and Allianz Trade data on global insolvency and business climate.