Romania: Reliance on Foreign Financing is Key Vulnerability of Credit Profile

Romania, rated BB (high), Stable, is exposed to elevated public financing risks, which emanate from its dependence on borrowing from international capital markets for funding very large fiscal deficits. Purchases of government debt securities by foreign investors, primarily fund managers, have been a major funding source in recent years, with net inflows amounting to 3.7% of GDP in 2024. This strong reliance on external borrowing, in turn, renders Romania vulnerable to a potential shift in international investor sentiment, which could result either from a domestic or an external shock. A high sensitivity of international capital markets to domestic political developments in Romania was exemplified in May 2025 as a strong temporary increase in political uncertainty between the two rounds of presidential elections was accompanied by a marked increase in exchange rate volatility and rising government bond yields. The Romanian government's dependence on foreign funding is likely to remain high in coming years as the budget deficit is projected to remain large and the capacity of the domestic banking sector to step up lending to the government is limited.

Key Highlights
-- Budgetary pressures in Romania are likely to remain larger than in other EU countries in 2025 and 2026.
-- The domestic banking sector's small size constrains its ability to accommodate large future public sector financing needs.
-- The domestic banking sector already has a large concentration risk towards the domestic government.

"The very large fiscal deficit and a reliance on rather unstable funding sources expose the Romanian government to elevated financing risk," said Yesenn El-Radhi, Vice President of the Sovereign Group at Morningstar DBRS. "Reducing these financing risks requires a marked and sustained reduction of the government budget deficit."

"The domestic banking sector has limited capacity to fully accommodate large public sector financing needs due to its comparatively small size," said Halil Senturk, Assistant Vice President of the European Financial Institutions Group at Morningstar DBRS. "The small size of the banking sector, in turn, results from different structural factors which are unlikely to change in the short-to-medium term."