The year Anno Domini 2024 marks a pivotal super-election year for Romania, with citizens voting in local, European Parliament, presidential, and parliamentary elections, shaping governance at all levels. However, the numerous elections have triggered a spending surge, expected to push Romania’s 2024 budget deficit to 8% of GDP. Furthermore, in the wake of the political turmoil following the first round of the presidential election, Romanian capital markets reacted with increased risk aversion, driving the BET index down approximately 5% since the election process began in November. Therefore, we ask the question: Should you buy the Romanian dip?
The local and European Parliament elections held back in June, hinted at a political shift toward the far-right. However, few anticipated that a former member of the far-right Alliance for the Union of Romanians (AUR), now independent presidential candidate Călin Georgescu, would secure a first-round victory on November 24th, with 23% of the votes.
Georgescu, known for his critical stances on the EU, NATO, and Zelenskyy, has repeatedly argued that Romania should “engage, not challenge, Russia”. In addition to his pro-Russian rhetoric, Georgescu has faced significant backlash for his pro-fascist positions. His campaign, heavily focused on TikTok, resonated with young voters as he emphasized the soaring cost of living in Romania, a country with the highest share of people at risk of poverty in the EU.
On the other hand, the clear favorite before the election, current leftist Prime Minister Marcel Ciolacu, even failed to make it to the second round. The unprecedented defeat of candidates from the ruling coalition (leftist PSD and liberal PNL) led to both party leaders resigning, as voters decisively shunned the established parties. Instead, support surged for reformist Elena Lasconi and her pro-European agenda. Lasconi, the leader of the opposition Save Romania Union (USR), secured 19% of the votes, positioning her as Georgescu’s challenger in the run-off.
However, the aftermath of the first round of Romania’s presidential election proved even more turbulent than the vote itself. The Constitutional Court ordered a recount of votes following allegations that Elena Lasconi had received votes transferred from another candidate who had withdrawn but still appeared on the ballots. Ultimately, the Court upheld and validated the results of the first round.
Compounding the controversy, Romania’s top security body issued warnings about hostile actions and cyberattacks targeting the electoral process, allegedly originating from Russia. These efforts also carried through the Chinese social media platform TikTok, were said to have significantly boosted Georgescu’s exposure, as he had been polling in single digits before the election. Reports suggested Georgescu benefited from preferential treatment on TikTok, as his content was not flagged as political, nor was he required to label electoral content. Of course, both Russia and TikTok have systematically denied any interference in the electoral process. Nonetheless, these allegations have added an additional layer of uncertainty and tension to an already controversial election.
In the middle of two presidential election rounds, on December 1st Romania held its parliamentary elections, with the ruling leftist PSD emerging as the winning party once again, securing 22% of the votes. However, far-right parties made significant gains, collectively occupying a third of the seats in the new legislature (AUR with 18%, SOS with 8%, and POT with 6%).
In response, the liberal PNL, reformist USR, the Hungarian UDMR, and representatives of ethnic minorities joined forces with the PSD to form a pro-Western alliance, commanding more than 60% of the parliamentary vote. The coalition signed a joint pro-European and Euro-Atlantic declaration, emphasizing their shared commitment to stability, modernization, and the development of Romania.
Looking at Romania’s next cabinet, the most pressing issues, aside from the possibility of a pro-Russian president, include the 2025 budget plan, fiscal consolidation, and uncertainties surrounding access to EU funds and the energy market.
The most pressing concern is Romania’s projected 2024 budget deficit of 8% of GDP, driven by an election spending surge. In October, Romania submitted a plan to the European Commission outlining a strategy to reduce the deficit below 3% of GDP within seven years, with rating agencies and analysts expecting tax hikes as part of this effort, as Romania currently has one of Europe’s lowest tax takes. Moreover, fiscal consolidation has been identified as a key priority to unlock additional EU funds, which are critical for further infrastructure investments and economic growth. On the energy market, the government has implemented an energy support scheme for households, small businesses, and industry, partially regulating electricity and gas markets until March 2025. However, it remains unclear how the government will transition to deregulating the market or what impact this shift will have on bills and inflation, particularly in the absence of a 2025 budget.
It is worth mentioning one more critical detail – last Friday, Romania’s Constitutional Court has unanimously annulled the entire presidential election. This time it was the aforementioned reports alleging Russian involvement in cyber activities that did the trick and made the situation even more complicated. Having summarized the extremely high political uncertainty in Romania, let’s move on to the soaring investor risk aversion.
Global and regional indices comparison to BET (2024 YTD, %)
Source: Bloomberg, InterCapital Research
As we can see, the BET index enjoyed a strong and impressive start of the year, with only Slovenia’s SBITOP outperforming it up until late August. This was in addition to the previous two years, during which the index recorded excellent growth driven by the positive effects of nearshoring, anticipation of Schengen membership, and emerging market status. These factors were supported by a well-diversified set of companies, with the biggest weight attributable to those from robust energy and financial industries. However, the Romanian capital market has faced multiple corrections since then. The sharp decline observed in November can be largely attributed to presented escalating political uncertainties, which significantly eroded investor sentiment. Additionally, the mixed Q3 2024 results posted by BET constituents – such as the energy sector struggling with lower energy prices – contributed to the downward pressure, further amplifying market volatility during this period.
P/E and P/B comparison between BET, SBITOP and CROBEX10 (Current values)
Source: InterCapital Research
When comparing Romania to other regional markets, we can see that it trades at lower P/E values, while its price to book ratio remains comparable. This positioning makes Romania even more attractive, as it appears cheaper not only relative to global markets but also to smaller regional ones.
To sum up, the situation in Romania has significantly escalated during this super-election year. The next Romanian government will face considerable challenges, including addressing the budget deficit, implementing fiscal consolidation, and dealing with the deregulation of the energy market. However, positive developments such as Schengen membership, the continued benefits of nearshoring, a strong and resilient energy and banking sector despite short-term hurdles, and the country’s impending status as an emerging market all contribute to a generally optimistic outlook for Romania. While the current turmoil in the Romanian capital market and the political tension are far from ideal, they could present attractive investment opportunities once the situation stabilizes.
