Romania: The current account worsens before it improves

Romania's central bank released June balance of payments data today, completing the picture for the first half of 2026. At first glance, the numbers appear counterintuitive. The economy has contracted or at best stagnated for three consecutive quarters, household demand is weak and fiscal consolidation has significantly reduced the cash budget deficit. Yet the current account deficit widened further in nominal terms, while posting only a marginal improvement as a percentage of estimated 2026 GDP.

The current account deficit reached EUR14.2bn in 1H26, up 4.8% versus 1H25. While this is moving in the wrong direction, the composition of the deterioration matters. Nearly all the widening came from the income balance, while the goods and services deficit was broadly unchanged at EUR9.7bn.

That distinction is important because fiscal tightening primarily affects domestic demand and imports. The external adjustment mechanism appears to be working, but more slowly than the headline current account figure suggests.

The primary income deficit widened by EUR848m to EUR4.7bn, accounting for more than the entire deterioration in the current account balance. Contrary to what may be assumed, the shift was not driven by a surge in dividend repatriation. Outflows related to direct investment income increased only marginally, reaching EUR5.74bn in 1H26 from EUR5.70bn a year earlier.

Instead, higher financing costs played the dominant role. Portfolio investment income debits, likely reflecting the growing external debt burden and larger interest payments to non-resident investors, rose to EUR2.64bn from EUR2.33bn. Other investment income debits, which mainly capture interest on loans and trade credit, increased to EUR918m from EUR738m. At the same time, compensation of employees received from Romanians working abroad declined by roughly EUR190m.

In other words, Romania's external accounts are increasingly affected by the cost of financing past deficits rather than by current import demand.

The goods and services deficit widened by only EUR61m year-on-year. Exports of goods and services increased by 4.2% in 1H26, slightly outpacing the 3.0% increase in imports.

Within services, the aggregate picture masks substantial divergences. The travel deficit widened to EUR2.48bn from EUR1.95bn a year earlier as Romanians continued to spend abroad faster than foreign visitors spent in Romania. However, this deterioration was largely offset by strong performances elsewhere. The surplus in other business services rose by one-third to EUR1.44bn, transport services generated a EUR3.2bn surplus, while IT, telecommunications and information services delivered a EUR3.6bn surplus.

The implication is that Romania's structural external earners remain resilient even as tourism continues to act as a persistent drag.

The recent stabilisation in the trade balance is also consistent with the gradual correction of Romania's twin deficits. Fiscal consolidation is reducing domestic demand, but the impact on imports tends to materialise with a lag, suggesting that part of the external adjustment may only begin to emerge.

At the same time, not all imports are equal. Part of Romania's large trade deficit in recent years has reflected a strong investment cycle, requiring sizeable imports of machinery, equipment and intermediate goods. To the extent that these imports are associated with productive capacity expansion, they should support future export potential and help improve the quality of the adjustment over time.

A more encouraging development came from the capital account. Net capital transfers, largely reflecting EU funds, increased by 32.5% year-on-year to EUR5.16bn. June alone brought EUR2.7bn in inflows. As a result, the capital account financed more than one-third of the current account deficit in 1H26. This reflects improved absorption of European funds and partially offsets weaker private financing flows.

The most striking element of the release was, in our view, the collapse in net FDI inflows. Net direct investment amounted to just EUR527m in 1H26, down from EUR3.4bn a year earlier. Coverage of the current account deficit therefore fell to barely 3.7%, compared with around 25.0% in 1H25.

The underlying picture may be somewhat less alarming than the headline suggests. April recorded a net FDI outflow of EUR745m, largely due to a EUR936m decline in equity capital and reinvested earnings. Given that 2025 was Romania's strongest year for net FDI inflows in several years, with inflows reaching roughly EUR7.5bn, part of the current weakness may reflect large dividend distributions and company-specific balance-sheet operations rather than a broad-based deterioration in investor appetite.

The key question for the second half of the year is whether what we've seen in the first half proves to be a one-off, which is more likely in our view, or the beginning of a more persistent slowdown.

Despite the somewhat disappointing first-half outcome, we continue to expect some narrowing of the current account deficit relative to GDP over the remainder of 2026. Several factors support that view:

• Fiscal tightening typically affects imports with a lag of several quarters;
• Dividend-related and interest-payment effects are concentrated in the first half of the year;
• Nominal GDP growth remains strong because of elevated inflation, helping to reduce the deficit ratio;
• Accelerating absorption of Recovery and Resilience Facility and cohesion funds should continue to support both financing and investment activity.

That said, the adjustment story should not be overstated. Romania entered 2026 with a current account deficit close to 8.0% of GDP. A move towards 7.0%, our estimate, remains achievable, but the path appears shallower and more gradual than the headline fiscal consolidation might suggest.

Looking further ahead, the adjustment should increasingly benefit from supply-side improvements rather than demand compression alone. The launch of Neptun Deep, together with continued investment in energy, manufacturing and strategic industrial sectors, has the potential to improve Romania's export capacity and reduce some of its structural external imbalances.

Romania's nominal external position deteriorated marginally in the first half of 2026, but we think that the details are less concerning than the headline suggests. The widening of the current account deficit in nominal terms was driven almost entirely by higher income outflows and debt-servicing costs, while the trade balance was broadly stable and exports continued to outperform imports.

The adjustment process therefore appears delayed rather than derailed. Fiscal tightening has yet to fully feed through into import demand, while stronger EU fund inflows are helping finance the deficit. At the same time, part of Romania's external imbalance reflects an investment cycle that should support future productive capacity rather than consumption alone. The main uncertainty, in our view, is not the trajectory of the current account itself, but whether the sharp drop in FDI proves temporary or becomes a more durable feature of Romania's external financing mix. Longer term, the success of projects such as Neptun Deep will be important in determining whether Romania can finally move from cyclical correction towards a more durable improvement in its external balances.