Romanian Bonds Sink as Budget Woes, Election Risks Fuel Selloff

(Bloomberg) -- Romania’s debt is under increasing pressure from investors concerned about a widening budget deficit, a string of elections and unexpectedly weak economic growth.

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The yield on the 10-year local government bonds jumped to 7.09% this week, pushing the premium over comparable German securities to the widest since June last year and leaving Romanian notes as the riskiest among peers in the European Union.

The $350 billion economy is confronting a confluence of risks before it heads into parliamentary and presidential elections this month and in December. As the government boosts social spending and investment before the ballots, the deficit is likely to widen beyond 7% of economic output this year and may force the next administration to raise taxes to trim the shortfall.

Romanian government bonds will “probably stay on the back foot” in the coming weeks due to political and geopolitical uncertainties combined with “unsupportive” external financial conditions for emerging markets, according to Marek Drimal, a strategist at Societe Generale SA in London.

“However, we would turn bullish in early 2025 if a fiscal consolidation package is delivered, and global investor sentiment, in EM, at least stops deteriorating,” Drimal said. “The local story of fiscal consolidation is crucial here.”

The Balkan nation also faces one of the highest inflation rates in the EU, while preliminary data showed that the economy barely avoided a recession in the third quarter. Weak growth is further complicating fiscal efforts because the government needs solid nominal growth to boost revenue and help improve the deficit and debt ratios relative to gross domestic product.

Erste Group Bank AG has lowered its full-year economic growth forecast to 0.8% for 2024, from the previous estimate of 1.9%. It kept next year’s outlook at 2.8%, “although risks lean to the downside, depending on fiscal measures likely to be introduced at the start of 2025,” said Vlad Ionita, an economist with the bank in Bucharest.

The worsening budget forced the central bank to halt interest-rate cuts and keep borrowing costs steady at the past two meetings, with officials saying that future policy easing hinges on a budget consolidation plan.

Once that happens, investors may again pile into the country’s bonds, which are “the cheapest in the region,” Drimal said.

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