Romania has been going through a period of economic and fiscal troubles, driven by external macroeconomic and geopolitical factors, but also internal issues related to governance, regulation, and persistently high inflation, all of which weakened real growth in the last couple of years. The political situation can also be characterized as unstable, with the recent no-confidence vote bringing down the coalition Government. Furthermore, on 26 August 2026, Romanian President Nicușor Dan announced that PSD, PNL, USR, and UDMR had failed to agree on the public-sector remuneration law and had collectively accepted the expected EUR 770m loss associated with that milestone under the Recovery and Resilience Plan (RRP), which is financed through the EU’s Recovery and Resilience Facility (RRF). Despite these issues, the Romanian equity market recorded a strong rally in the last couple of years, defying the difficult economic backdrop. In today’s blog, we review the entire situation, as well as try to gauge how it might develop and what impact it could have on the country’s equity market.
Firstly, starting with the potential loss of RRF funding. On 26 August 2026, Romanian President Dan announced that four parties involved in the negotiations, i.e. PSD, PNL, USR, and UDMR, had failed to reach an agreement on the public-sector remuneration law, one of the milestones included in Romania’s RRP that the country had to meet to receive RRF funding.
With the failure to reach this milestone by the implementation deadline of 31 August 2026, it is likely that Romania’s final RRF payment will be reduced by the amount attributed to it, estimated by the Romanian Presidency at EUR 770m. The final amount will depend on the EU’s review of the country’s progress and supporting evidence, although a positive assessment appears unlikely given that no agreement was reached and the law was not enacted by the deadline. Even if the parliament was to pass the law by the end of the year, it would help the country’s reform progress, but it would not allow Romania to recover the milestone-linked amount. The Commission has until 31 December 2026 to make the final RRF payments.
The story with this goes a little bit deeper, and it’s not a story of “the country did everything right and the EU decided to sanction it because it wasn’t enough”. It’s a story of continued work but also lack of progress in regard to this law. On 17 July 2026, the Romanian Ministry of Labour said that the updated draft of the public-sector remuneration law had been prepared after many consultation meetings, and more importantly, that it met the requirements of Milestone 420. By 1 August, President Nicușor Dan announced that only three important RRP milestones were outstanding, i.e. ANI legislation, biodiversity legislation, and public-sector salary law, although he did describe the salary reform as the most difficult. By 28 August, he had mentioned several other PNRR-related measures, including biodiversity and PNRR-closing legislation, that need to be enacted. In other words, the potential loss is more due to Romania’s inability to complete the required reforms within the given time frame than an EU decision to block Romania. It should be noted that, as of 4 September 2026, the EU had not issued a final Romania-specific decision confirming a deduction of exactly EUR 770m. The amount remained the Romanian Presidency’s official estimate of the expected loss.
The EUR 770m amount is macroeconomically manageable in isolation, representing approx. 0.2% of Romania’s 2025 nominal GDP of EUR 380bn. The real issue is the information content of the failure. It highlights three risks that were already present: a weak ability to execute politically difficult reforms, an exceptionally large fiscal deficit, and political fragmentation that culminated in the previous coalition Government’s collapse (May 2026).
The macroeconomic mix is unusually difficult for an EU economy.
Romanian real GDP change (2015 – 2027E*, %)
Source: Eurostat, EBRD, InterCapital Research
*2026E and 2027E based on estimates
Real GDP growth slowed down from 5.6% in 2021, down to only 0.7% in 2025. At the same time, HICP inflation remained high, at around 6.8% in 2025.
Romanian HICP inflation growth (January 2020 – July 2026, %)
Source: Eurostat, InterCapital Research
Issues extend even deeper into the economy, with the Government deficit estimated at 6.2% of GDP in 2026 according to the EC’s Spring 2026 forecast, although it did improve from 9.3% in 2024 to 7.9% in 2025. This suggests that the previously implemented austerity measures are beginning to improve the fiscal position, although the deficit remains exceptionally large and the durability of the adjustment is not yet assured. These measures include a 2-year freeze in public wages and pensions, the increase in the standard VAT rate from 19% to 21%, the introduction of an 11% reduced rate, a higher dividend tax, heavier taxation of banks, energy and hydrocarbon companies, and spending controls. Furthermore, the former Government also implemented partial reversals of some investment-hostile corporate taxes, including the minimum turnover tax, which was reduced to 0.5% in 2026 and is scheduled to be removed in 2027, the construction tax, which is scheduled to be abolished in 2027, and the micro-enterprise tax, which was simplified to 1%.
Romanian fiscal deficit (% of GDP, 2020 – 2026E*)
Source: Eurostat, European Commission, InterCapital Research
*2026E based on estimate
With the fiscal consolidation underway, real GDP growth remained weak, while persistently large deficits and higher interest costs continued to push the Government’s net debt-to-GDP level higher. On the IMF’s net-debt measure, the level rose from 40.7% in 2021 to an estimated 50% in 2025 and is expected to increase further to 51.6% in 2026.
Romanian General Government net debt as % of GDP (2020 – 2026E*)
Source: IMF, InterCapital Research
*2026E based on estimate
The high inflation level was one of the primary reasons why the Romanian Central Bank increased interest rates, starting in 2021, all the way to 7% in 2023, before reducing them twice by 25 bps in 2024, to 6.5%. It has maintained the rate at this level since then, with the latest meeting in August reaffirming it.
The high-interest rate environment benefited banks, particularly through higher interest margins, but they were also hit by additional sector taxation introduced as part of the broader fiscal-consolidation effort.
Now that we have a general idea of the state of the economy, one could ask, what’s next?
Romanian RRF Funding Risk and Equity-Market Transmission
Source: European Commission, Presidency of Romania, InterCapital Research
The failure to comply with Milestone 420 means that it is likely that the country’s final RRF payment will be reduced by the amount attributed to that milestone. Other eligible RRF amounts could still be distributed if the corresponding milestones and targets are judged to have been satisfactorily fulfilled. The stronger impact on the Romanian economy could come from a future reduction in Romania’s sovereign credit rating. Major rating agencies have already placed Romania on a Negative Outlook while retaining its investment-grade rating, meaning that a downgrade remains a risk if fiscal and political conditions deteriorate further. The loss of EU funding would increase national financing needs, while weaker reform credibility and a potential rating downgrade would increase the cost of that financing, leading to higher sovereign risk premiums, higher corporate discount rates, and tighter credit.
In the end, it could put more pressure on BET, especially banks and policy-sensitive state-owned enterprises (SOEs). Combined with continued fiscal pressures, this could create a self-reinforcing cycle. However, not all is doom and gloom. While the short-term outlook is uncertain, the previously announced measures are having some impact on improving the State’s finances, although the deficit remains very high.
Furthermore, despite the pressures on the economy in the last couple of years, the Romanian equity market continued to perform well, recording strong increases during this period.
BET index performance (2020 – 2026 YTD, %)
Source: Bloomberg, InterCapital Research
Since the beginning of 2020, BET index recorded an increase of approx. 244%, and that’s excluding the impact of dividends, with the typical dividend yield on the index level ranging between 4-7%. The growth across equities was broad-based, with many different industries recording increases. Fondul Proprietatea was the main negative outlier on a price-return basis, although this was largely tied to the disposal of Hidroelectrica, the resulting change in its portfolio, and substantial distributions to shareholders. Its total shareholder return therefore differs materially from its raw share-price performance. Even the more recent deterioration in the economic and political situation did not prevent the overall index from rising, as it recorded an increase of approx. 40.5% YTD by early September 2026.
Current BET index constituents’ performance (2020 – 2026E)*
Source: Bloomberg, InterCapital Research
*Hidroelectrica, Premier Energy, One United Properties, Cris-Tim, Aquila, and Transport Trade Services price performance as of listing date
For the individual Romanian blue-chips, the story isn’t as dark. The EUR 770m shortfall does not have a material direct impact on them. Despite the change in the regulatory environment, internal and external cost pressures, wage inflation, the disrupted energy environment, newer taxes, etc., they were able to perform well for several reasons. Firstly, many of them were traditionally priced at lower levels compared to their counterparts in more developed countries. Secondly, many of the companies actually benefited from some of the conditions present during the periods of crisis, such as higher energy prices for energy producers, higher interest margins for banks, and personal consumption growth for food and retail companies.
From 2020, 17 of the 20 current index constituents (with the caveat that several are from their listing date) recorded triple-digit nominal price growth in RON, ranging from 118% to approx. 675%. This is an unusually strong result, particularly given Romania’s deteriorating macroeconomic and political backdrop.
The main issues that companies could face moving forward are changes in regulation and taxation levels, moves that were popular with many Romanian governments and seen as one of the primary ways to contain the fiscal deficit, especially in the context of many of these companies having a small or significant state ownership stake.
More importantly, despite the breadth of the companies included, the index is quite concentrated. Top 3 largest-weighted companies, Banca Transilvania, OMV Petrom, and Romgaz, make up approx. 49.2% of the index; top 5 make up approx. 67.6%; while top 10 make up approx. 90.5%. Most of these companies are either banks or energy and infrastructure companies, sectors which could be hurt by additional taxes and regulations, as we’ve seen in the last couple of years.
There is a positive in here though, as many of these energy companies are investing heavily. In the context of potentially elevated energy prices due to the conflicts in the Middle East, producers with direct commodity-price exposure could benefit from higher realized prices, which would also indirectly benefit the State through dividends and taxes. However, this effect would not be equal across the sector, especially for regulated network operators and suppliers, while special taxation could transfer part of the upside to the State. Banks are also benefiting from higher interest rate environment, outperforming Western European peers in terms of relative growth.
Despite all of this, these two sectors remain attractive, although the relationship is not one-way. Higher interest rates can continue supporting bank margins in the near term, but they do not automatically translate into higher ROEs, especially if they lead to slower credit growth, higher funding costs, and weaker asset quality. Likewise, higher energy commodity prices would benefit producers more directly than regulated network operators or suppliers, while additional taxes could absorb part of the upside. Other sectors are harder to define; bringing inflation under control would support real household income and eventually allow more favourable financing conditions. Slower wage and input-cost growth could also improve profitability margins for food producers and retailers and support the construction and pharma sectors, although this would depend on the development of demand and the companies’ ability to pass on costs.
In general, in the short term, a lot depends on whether a stable Government can be formed and whether it can pass meaningful reforms. Fiscal execution, inflation, the EC’s final assessment of Romania’s RRF payment request, and developments in energy markets will also remain important. In the end, while the short-term impact of these reforms could put pressure on the entire economy, they should allow for better development down the line. Many Romanian companies still trade at discounts to their developed-market peers, although part of that discount reflects higher fiscal, regulatory, and governance risk. Whether their earnings growth will be enough to justify that risk is a question each investor should ask themselves. From a historical perspective, despite all the challenges, the Romanian equity market has remained resilient. Past performance does not guarantee the same outcome, but it isn’t far-fetched to say that the market could remain resilient in the future as well.