Citigroup has flagged growing fiscal risks tied to Romania’s political instability, cautioning that continued turmoil could undermine the country’s public finances and place pressure on domestic sovereign debt.
Market moves have already reflected some of that concern: the yield on Romania’s 10-year local-currency government bond climbed for a fifth straight trading day, increasing by 2 basis points to 7.21%, a level Citi notes is the highest seen in about four weeks.
In a report, Citi strategist Bhumika Gupta emphasized the centrality of the fiscal agenda for investors, particularly given the current political uncertainty. "Generally, we see an increasing probability of a larger fiscal slippage under an increasing amount of scenarios," Gupta wrote, underscoring the bank’s view that fiscal outcomes have deteriorating odds under multiple potential paths forward.
The bank also observed that the immediate reaction in currency and bond markets has been muted. Citi attributes this relative calm to lower offshore positioning following the US-Iran conflict, which has left less external exposure to drive abrupt moves. The report warns, however, that there remains room for further selling pressure or curve steepening in the ROMGB market if prolonged uncertainty over fiscal policy persists.
Beyond market moves, Citi highlights a concrete policy and funding risk: Romania could face the loss of close to c8 billion from the European Union's Recovery and Resilience Facility if domestic political instability undermines its ability to meet the program's requirements.
On the currency front, Citi expects the central bank to act to defend the leu at current levels and to keep volatility subdued. The bank cites larger foreign exchange reserves and describes the present political turbulence as less severe than last year’s pre-election crisis, factors it believes will help the central bank sustain a defensive stance.
Context limitations: The report presents Citi’s assessments and near-term market observations based on current developments and does not provide a forecast beyond the scenarios described.