CEE: RON Extends Relief Rally But Challenges Ahead to Curb Ratings Downgrade

The clear margin of victory for centrist and pro-EU candidate Nicusor Dan against nationalist George Simion in the second round of Romania’s presidential election is perceived to be the most market-friendly outcome. Accordingly, RON has rallied below 5.050/EUR for the first time since the result of the first round two weeks ago with the leu’s 1.7% surge today its biggest intraday move since 2022. Yields on EUR-denominated bonds are as much as 50bps lower, while the Bucharest BET index has now rallied around 7% over the past two sessions.

• Despite the relief for Romanian assets today, with the nation’s ratings outlook having been revised from Stable to Negative by Fitch in December, S&P in January and Moody’s in March, Dan faces the difficult challenge of forming a stable, majority government and then passing a fiscal consolidation package to deal with the unsustainable deficit.
• Indeed, Commerzbank believe the market will want to see more action from the government on the fiscal side to stave off negative views from rating agencies. On the flip side, FX should be the biggest beneficiary from the end of political uncertainty, with 5.05 as the new line in the sand.
• Meanwhile, JP Morgan say a rating downgrade to sub-investment grade is now less likely but still a risk. With Dan president we see a good chance that the right fiscal measures will be taken, JPM argue, while it is likely that EU leaders will remain supportive of Romania.
• Prior to the election result, Goldman Sachs noted that if Dan wins, there would likely be some market relief, but that this relief may prove to be temporary, as the next government will face a challenging and politically unpopular adjustment to the fiscal deficit, with no guarantee of success