Erste Bank: Romania Faces Significant Risk of S&P Downgrade Ahead

Romania is facing a significant risk of a credit rating downgrade by S&P, although Erste Bank analysts’ base-case scenario is for the country’s rating to be maintained. “Our base-case scenario is that the rating will be maintained, but the downgrade risk is significant. We believe S&P will probably wait to see what the 2027 budget bill will look like and how the political situation will evolve,” Erste Bank said in a report reviewing economic developments in Central and Eastern Europe (CEE). Several CEE countries have managed to avoid recession, while labor markets have not been significantly affected by the economic slowdown. Although some economies are technically in recession, the outlook for the region has become more optimistic, according to Erste. The bank said it was revising its growth forecast to 1.0% for 2023, while Romania was continuing its slow path toward recovery in the manufacturing sector. At the same time, the ongoing conflict in the Middle East, with no clear prospects for a resolution, is keeping commodity prices elevated. As a result, higher fuel prices are contributing to an increase in global inflation. Poland is expected to be the most closely watched economy in the region this week, Erste said, as the probability of consumer price inflation reaching 4% in September is high. Such an outcome could fuel speculation about tighter monetary policy, particularly as the Polish central bank’s policy meeting is scheduled for the following week. In terms of price developments, producer price data are due to be published this week in Slovakia, Hungary and Romania. Retail sales figures for August are also expected in Slovenia, Croatia and Serbia, with Erste forecasting a slight moderation in growth. Meanwhile, industrial production in Croatia and Serbia is expected to post solid growth. The report highlighted Romania in particular ahead of Friday’s S&P review of the country’s credit rating and outlook, scheduled after the market close. “Our base-case scenario is that the rating will be maintained, but the downgrade risk is significant. We believe S&P will probably wait to see what the 2027 budget bill will look like and how the political situation will evolve,” the Erste Bank analysis concluded.