I wrote in April on our blog that the Romanian economy had been growing faster than anticipated, prompting the official forecast for growth in 2015 to be revised up from 2.2% to 3.3%. Representatives from the banking sector, such as the Chief Economist of the Bank of Transylvania and the Chief Economist of the Raiffeisen Bank, dared to predict growth even higher than 4% by the end of this year. This improvement was boosted by solid growth of 12.9% in the Construction sector, by increased investment in the IT industry, by a strong recovery of the Automotive market as well as by the growth of internal consumption, resulting from the drop in interest rates and from the cut of VAT on food from 24% to 9% in June.
Healthy Economic Growth and an Increased FDI and M&A
The latest figures released by the Romanian National Institute of Statistics indicate that the Romanian economy grew by 3.7%, higher than expected (3.3%) during the first 9 months of 2015 as growth during Q3 was 1.4% up on Q2. This made Romania the EU member state with the fifth highest annual economic growth after Ireland (7%), Malta (4.6%), Luxembourg (over 4.5%), Czech Republic (4.2%) and followed by Poland (3.5%), Slovakia (3%), Sweden (3%), Spain (2.9%), Hungary (2.8%) and the UK (2.7%). All sectors and industries contributed to this development. Particularly good news is the improvement of foreign direct investment (FDI) and the significant increase in the M&A market. €2.3 billion entered Romania during the first eight months of 2015, 61% more than the same period in 2014, and the M&A market recorded the highest increase among the Central and South Eastern Europe markets. The M&A barometer by EY reports that the total value of transactions went from $0.6 billion during the first half of 2014 to $2.1 billion in the first half of 2015. As a result of this economic growth, the European Commission improved the forecast for the Romanian economy in 2016 to 4.1%.
According to the Department for Foreign Investment and Public Partnership (EY) Romania ranks first in the EU for growth of agricultural exports and IT services, naval vessel exports, total investment share in GDP, speed of internet connectivity, and export growth for the past decade. It ranks second in the EU for the number of certified IT specialists, office space availability in metropolitan areas, wind energy potential, low labour costs and growth rate of the automotive industry in the past decade. It ranks third in the EU for oil reserves (600 million barrels), export growth rate of R&D services and energy independence.
However, Romania is lagging in the EU for waste recycling, highway development, size of mutual fund industry, GDP and insurance premium per capita and healthcare services (doctors’ salaries, fertility, life expectancy).
EU Funding & Macroeconomic Growth
Romania has improved its macroeconomic conditions considerably but it is still struggling to increase the absorption of EU funds, one of the main engines of the local economy. Romania is eligible for €22.5 billion (13.7% of GDP in 2014) for the period between 2014 and 2020. Six operational programs are considered for this period, among which the infrastructure operational programme has a generous budget of €9.4 billion. However, Romania has managed so far only a 50% rate of absorption, compared to an average of 71% in other new member states. The lowest absorption, 41%, was registered within the human resources operational program. Romania still has to absorb by the end of this year the remaining resources for each operational programme (a total of €8.6 billion) from the 2007 – 2013 period. Domestic governance and capacity issues are considered by the IMF to be the main causes of the suspension and interruption of some operational programs followed by the reimbursement of the amounts received. Other causes are the beneficiary capacity and the competence to identify, elaborate and manage programs, deficiencies of the public administration in evaluating and monitoring projects as well as the preference of public officials for investment projects financed only by Romania, because these escape the careful monitoring and evaluation accompanying the EU-funded projects.
Improving the EU funding performance has become one of the priorities of the new technocrat Government led by the former EU Commissioner of Agriculture, Dacian Ciolos. Angela Filote, the representative of the European Commission in Romania, underlined that Romania has to improve the absorption of the EU funds in order to avoid a trade-off between investments and public deficit in order to support the strong economic growth which had been fuelled by internal consumption and exports and less by public investments.
The European Commission also expressed concern about Romania`s capacity of tax collection as a result of the recent tax cuts and suggested that such measures are welcome if they are taken at the right time and are accompanied by the right compensatory measures to maintain the hard won substantial economic growth.
Close to Reaching Energy Independence
Romania is not far from reaching energy independence, however many things remain to be done to improve in this sensitive field. The CEO of Nuclearelectrica, Daniela Lulache, thinks that Romania can evolve into a regional energy hub and could play a significant role in the EU`s Energy Union project. Romania can be independent as well from the oil and gas perspective as it is the only country in the EU that benefits from an integrated cycle from uranium mines to production of nuclear energy. However, work needs to be done to increase the level of interconnection and deal with the problem of low electricity pricing. Apart from these, Romania needs substantial investments in production and exploration fields as well as more attention to the opportunities in the distribution sector.
Developing Agriculture but Below Potential
Steps are being made in Agriculture as more entrepreneurs and companies invest in farming businesses and banks are more flexible in providing the necessary funds, which is expected to create a boost in the growth of this sector. Dan Bota, the head of small business division of Intesa Sanpaolo Bank, explains that this positive change lies in the fact that business people are starting to capitalise on the existing potential and that it is normal for the banks to make their presence increasingly felt.
Despite improvements in entrepreneurial initiative and financing in Agriculture, land fragmentation remains a serious problem for both local and foreign investors looking to buy significant amounts of farmland. 80% of Romania`s farmland is divided among 800,000 farmers, each of them owning between one to five hectares. To address this problem, the Romanian government is trying to offer farmers incentives, via the National Program for Rural Development, to create and join cooperatives and producers` groups.
Real Estate is Back on Track
Real estate was one of the hardest hit sectors after the 2008-2009 financial crisis, but it has resumed growth in the last 12 months; office, industrial and logistics markets have started to recover strongly. In the retail segment, consumption has been going up as well, but real estate entrepreneurs express reservations. Ovidiu Sandor, real estate investor and developer of office buildings City Business Centre in Timisoara and The Office in Cluj, explains: `I, too, am optimistic about the real estate market, but I do have some reservations. They have to do with the fact that we find ourselves in a period when there suddenly is a lot of money available, and investors, who have been frustrated for years because they lacked the resources to develop their projects, are now able to do that. I am concerned, however, that not all of them ask themselves if there is demand for those projects and that we will once again begin a cycle when we hurry things up and we skip steps`.
Overall it has been a good year for Romania and the future can be seen in a positive although still cautious light. If Romania is a market you would like to trade with or to invest in, we encourage you to sign up for our newsletter and let us keep you up-dated about developments on this market.
Lorela Broucher is Managing Director of Europe Market Entry Services Ltd trading as The British Romanian Consultancy, an enterprise specialised in providing market entry services to EU and non-EU businesses committed to doing business in Romania and Central & Eastern Europe. For more info, visit our website at: www.thebrc.co.uk