Morningstar DBRS Assigns BB (high) Credit Ratings to Romania, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) assigned Long-Term Foreign and Local Currency - Issuer Ratings of BB (high) to Romania. At the same time, Morningstar DBRS assigned Short-Term Foreign and Local Currency - Issuer Ratings of R-3. The trend on all credit ratings is Stable.

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that risks to Romania's credit ratings are balanced and that Romania's elevated external and public financing risks are adequately captured by the newly assigned credit ratings. External and fiscal balances weakened markedly over the past year as a step-up in public consumption spending raised budgetary pressures and bolstered import demand. External and fiscal pressures are projected to remain large in coming years with the European Commission (EC) forecasting the average 2025-26 annual deficits in the current account and the government budget at 7.4% and 8.5% of GDP, respectively. Financing the large twin deficits is likely to require continued large external borrowing from international capital markets. Foreign purchases of government debt securities were a major funding source in recent years with net inflows amounting to 4.2% and 3.7% of GDP in 2023 and 2024, respectively. This strong reliance on external borrowing from international capital markets renders external and fiscal accounts vulnerable to a potential shift in international investor sentiment. At the same time, Morningstar DBRS notes that the formation of a new government coalition in June 2025 in tandem with the recent step-up in fiscal consolidation pressure from the European Council might lead to a faster-than-expected narrowing in external and fiscal deficits.

Romania's credit ratings are underpinned by its membership of the European Union (EU) and its still moderate, albeit rising, government debt-to-GDP ratio. The credit ratings assigned also reflect the sound financial condition of the domestic banking sector. However, significant structural challenges weigh on the credit profile such as a low level of labour productivity, governance deficiencies, and the economy's small and open nature, which renders it vulnerable to external shocks. Furthermore, in Morningstar DBRS' view, rebalancing external and fiscal accounts is complicated by the structural increase in public expenditure levels and the strong appreciation of the real effective exchange rate in recent years, as the latter has weakened the international price competitiveness of Romanian export industries. While the recent election of a new president and the formation of a new government coalition have reduced political uncertainty, Morningstar DBRS expects domestic political polarisation to remain elevated which, in turn, complicates the implementation of unpopular fiscal consolidation measures.

CREDIT RATING DRIVERS
The credit ratings could be upgraded if one or a combination of the following occur: (1) a durable and marked narrowing of the current account and fiscal deficits; (2) a convergence of income and productivity levels to the EU average; or (3) a lasting improvement of institutional quality.

The credit ratings could be downgraded if one or a combination of the following occur: (1) the current account and fiscal deficits remain at current levels over the medium term; (2) financing conditions become more challenging; or (3) there is a deterioration in institutional quality.

CREDIT RATING RATIONALE

Budgetary Pressures Are Very Large and Projected to Subside Only in a Gradual Manner

Budgetary pressures increased markedly in the run-up to the parliamentary and presidential elections in late 2024. The general government deficit widened to 9.3% of GDP in 2024 from 6.6% in 2023, driven by large increases in pensions as well as in public-sector wages and, to a lesser extent, by higher investment and interest expenditure. As a result, total general government expenditure rose to 43.5% of GDP in 2024 from 40.6% in 2023, whereas government revenues grew broadly in line with nominal GDP. Looking ahead, budgetary pressures are projected to remain very large and to subside only gradually as last year's increases in pension and wage spending levels by 20% and 22%, respectively, have raised expenditure levels in a structural manner. The EC forecasts the general government budget deficit to narrow to 8.6% of GDP in 2025 and to 8.4% in 2026. This takes into account fiscal consolidation measures that were adopted by the previous government in December 2024 such as a nominal freeze of pensions and public sector wages in 2025. At the same time, interest expenditure is projected to continue to increase.

In June 2025, the European Council stepped up fiscal consolidation pressure on the Romanian government as it lowered the permissible growth rates for net expenditure in 2025 and 2026 to compensate for the very large expansion of expenditure in 2024. Romania has been in the EU's excessive deficit procedure since April 2020. The new Romanian government coalition, which was only formed in June 2025, has announced several potential fiscal consolidation measures such a new tax on bank profits, higher property taxes, and a reduction in the public-sector workforce. A more detailed fiscal consolidation plan is to be published over the next few months. Furthermore, a future increase in defence spending is likely to add to budgetary pressures in the coming years. According to recent statements by Romania's new president, defence spending is planned to rise to 3.5% of GDP by 2030, up from 2.3% of GDP in 2024 (NATO definition). Financing the government's high projected deficits in the coming years is likely to require continued large issuances of Eurobonds to international investors. The issuance of Eurobonds has been an important funding source for the government in recent years with an average 2023-24 financing share of 33%. The reliance on foreign capital markets for funding large public deficits, in turn, renders Romania vulnerable to a potential shift in international investor sentiment.

Public Debt Is Moderate but on a Clear Upward Trajectory

Public debt has increased over the past years but is still moderate. General government gross debt rose to 54.8% of GDP in 2024 from 35.0% in 2019 related to large budget deficits. Looking ahead, the EC forecasts the debt-to-GDP ratio to increase to 63.3% in 2026 based on the expectation that the primary budget balance will continue to register large, albeit narrowing, deficits and that interest spending will continue to rise. The government's interest burden increased to 2.3% of GDP in 2024 from 1.4% in 2022, driven by higher borrowing costs particularly for local currency debt. The EC forecasts the interest burden to increase further to 2.8% of GDP in 2026 as domestic interest rates remain high and higher interest rates for foreign currency debt are projected to be increasingly passed through in the coming years. The government's foreign currency debt has a slower interest rate pass-through than local currency debt because of a comparatively long tenor. In March 2025, the average remaining maturity for Eurobonds stood at 9.1 years, compared with 4.2 years for local bonds. In terms of its debt stock, the government is exposed to foreign currency risk because of a rather large stock of foreign-denominated debt (primarily euro). In March 2025, foreign currency debt accounted for 42.1% of total government debt. While the RON-EUR exchange rate has been relatively stable in recent years, Morningstar DBRS notes that exchange rate volatility increased substantially between the two rounds of presidential elections in May 2025.

External Risks Are Elevated Because of a High Reliance on Portfolio Investment Inflows

Morningstar DBRS views external risks for the Romanian economy as elevated. The economy's current account deficit is very large and primarily financed by rather unstable types of financial inflows such as portfolio investment. The current account deficit widened to 8.3% of GDP in 2024 from 6.6% in 2023 as a result of weak external demand for Romanian exports and as the upswing in government spending fostered import demand. Going forward, the EC forecasts the current account deficit to narrow to an albeit still very large 7.9% of GDP in 2025 and 7.0% in 2026 based on the expectations that the government's fiscal stance will become less accommodative and that external demand, particularly for service exports, will improve. At the same time, rebalancing the current account is complicated by the large and steady appreciation of the real exchange rate in recent years as domestic prices and wages grew at a faster pace than those in most trading partner economies. Between Q1 2021 and Q1 2025, the real effective exchange rate appreciated by 23.4% when based on unit labour costs and by 20.4% when based on the GDP deflator. This strong real appreciation is likely to weaken the international price competitiveness of Romanian exports.

The most important external financing source in recent years were inflows of portfolio investment, a very large part of which relates to foreign purchases of government debt securities. Net foreign purchases of Romanian government debt securities amounted to 3.7% of GDP in 2024 compared with an average of 3.5% between 2020 and 2023. Instead, the financing shares of more stable external financing sources are markedly lower. Net inflows of foreign direct investment (FDI) stood at 1.6% of GDP in 2024 and primarily comprised a reinvestment of earnings. Inflows in the capital account, primarily EU capital grants, amounted to 1.2% of GDP in 2024. In view of the large projected current account deficits, Morningstar DBRS regards a potential sudden stop or a reversal of portfolio investment flows as an important external risk for the Romanian economy. Furthermore, the external position is weakened by the economy's negative net international investment position which amounted to 42.7% of GDP in March 2025. The latter can primarily be ascribed to negative net asset positions in direct investment (33.8% of GDP) and portfolio investment (20.1%), whereas reserve assets amounted to 20.0% of GDP. In April 2025, the central bank's international reserves covered 144% of outstanding short-term external debt.

Economic Growth Decelerated and Is Projected to Recover Only Gradually

Economic growth decelerated since late 2023. After growing by 2.4% in 2023, real GDP expanded by just 0.8% in 2024 and stagnated in Q1 2025 on a quarter-on-quarter basis. While private consumption increased markedly in the past related to strong wage growth, net exports and, to a lesser extent, investment activity weakened significantly. Net exports deteriorated as strong private consumption drove up import volumes. In addition, export activity weakened on the back of sluggish external demand and as the strong increase in unit labour costs weighed on the economy's international price competitiveness. Looking ahead, economic growth is projected to strengthen gradually. The EC forecasts annual real GDP growth at 1.4% in 2025 and at 2.2% in 2026 based on the expectations that investment and exports particularly of services will recover in a gradual manner. While the monetary policy stance remains relatively tight, investment activity is likely to be supported by the recent disbursement of the third tranche of NextGeneration-EU funds. The outlook for goods exports is exposed to substantial uncertainty on how global trade tensions will evolve over the next several months. While the Romanian economy's direct trade linkages with the U.S. are comparatively small, potential higher-for longer U.S. tariffs would likely affect the economy through indirect trade linkages via Germany.

In general, Romania's credit profile is constrained by a comparatively low level of labour productivity and the economy's small size which renders it vulnerable to global trade shocks. While the economic importance of skill-intensive service industries such as the information and communication technology industry and professional services has increased moderately over the past decade, a significant portion of the domestic labour force remains employed in sectors with comparatively low levels of labour productivity. For example, the agricultural sector accounted for 20% of domestic employment but only 3% of gross valued added in 2024. Furthermore, demographic pressures and a comparatively low labour participation rate weigh on the economy's growth potential.

Financial Condition of Banking Sector Is Sound but Concentration Risk Towards Domestic Government Is Large

The overall financial condition of the domestic banking sector is sound. The banking sector benefits from good capital buffers with the average CET1 ratio of Romanian banks standing at 19.7% at YE2024. Furthermore, banks' profitability is good, supported by still high interest rates. The banking sector's funding position is solid and highly reliant on domestic deposits from households and non-financial corporates whereas foreign liabilities are relatively low. Asset quality is sound. The stock of nonperforming loans stood at 2.6% of gross loans at YE2024. Looking ahead, pockets of vulnerability might result from still high domestic interest rates, which might strain the repayment capacity of some borrowers. In addition, a significant share of corporate loans is denominated in foreign currency, which could pose a risk in case of a potential currency depreciation. At the same time, the repayment capacity of households is supported by a very low level of household debt (2024: 15.2% of GDP). That said, the domestic banking sector has a large concentration risk towards the domestic government. According to the European Central Bank (ECB), total credit to the domestic government accounted for 27.7% of the banking sector's total assets in April 2025, the highest share across EU countries. The size of the domestic banking sector is comparatively small. Total assets of domestic banks amounted to 52% of GDP in March 2025.

Credit Profile Reflects Governance Deficiencies but Benefits From EU Membership

Romania's institutional quality suffers from relatively weak governance in the judicial system and weak control of corruption. The World Bank Group's governance indicators for Romania are weaker than those of most EU peers. At the same time, Morningstar DBRS views Romania's membership in the EU as an anchor for institutional quality. Domestic political polarisation is elevated, which can partly be ascribed to large regional disparities. Furthermore, domestic political tensions have increased in recent months following the decision of the country's Constitutional Court to annul the results of the first round of presidential elections in November 2024 which were won by the far-right candidate Calin Georgescu. The re-run of the first round of presidential elections in early May was won by the far-right candidate George Simion which, in turn, led to the resignation of the country's Prime Minister Marcel Ciolacu. The second round of presidential elections were won by centrist Nicusor Dan in mid-May. Furthermore, a new four-party government coalition was formed in mid-June. While the formation of a new government coalition lowers short-term political uncertainty, Morningstar DBRS expects domestic political polarisation to remain elevated which, in turn, makes addressing economic policy challenges more difficult. In view of the latter, Morningstar DBRS applied a negative qualitative adjustment to the `Political Environment' Building Block Assessment.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a significant effect on the credit analysis.

Social (S) Factors
The following Social factor had a significant effect on the credit analysis: Human Capital and Human Rights. Romania's GDP per capita stood at USD 20,278 in 2024, which is relatively low when compared with EU peers mainly because of a still low labour productivity. Morningstar DBRS has taken this factor into account in the Economic Structure and Performance Building Block.

Governance (G) Factors
The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance, and Transparency. According to the World Bank Group's Worldwide Governance Indicators in 2023, Romania's ranks for Rule of Law (64.2 percentile) and for Government Effectiveness (46.7 percentile) were significantly lower than those of most other EU countries. The following factor had a relevant effect on the credit analysis: Bribery, Corruption and Political Risks. Romania's rank in the Control of Corruption indicator (2023: 56.1 percentile rank) has improved in recent years but remains significantly below the EU average. These factors have been taken into account in the Fiscal Management and Policy and Political Environment Building Blocks.

There were no Environmental factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments https://dbrs.morningstar.com/research/458592.

Notes:
All figures are in Romanian new leu (RON) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments (15 July 2024), https://dbrs.morningstar.com/research/436000. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings, https://dbrs.morningstar.com/research/454196, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for these credit ratings include Government of Romania (National Medium-Term Fiscal Structural Plan, October 2024), Ministry of Finance - Public Debt and Treasury Flows Management (Investor Presentation, May 2025; Public Debt Bulletin, March 2025), National Bank of Romania (Inflation Report, May 2025; Financial Stability Report, June 2025; Statistics), National Institute of Statistics, European Commission (European Economic Forecast Spring 2025, May 2025; 2025 Country Report Romania, June 2025; 2024 Rule of Law Report, July 2024), Eurostat, European Central Bank (ECB), International Monetary Fund (World Economic Outlook April 2025; International Financial Statistics; Romania: 2023 Article IV Consultation December 2023), OECD, European Environment Agency, NATO, World Bank Group, Bank for International Settlements and Macrobond. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

These credit ratings concern a newly rated issuer. These are the first Morningstar DBRS credit ratings on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/458591.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Yesenn El-Radhi, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 11 July 2025
Last Rating Date: Not applicable as there is no last rating date.

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