Romania - The Country of Business Paradox

The significant decrease of new insolvencies remains relevant only in statistical terms, and will remain so also for 2016, as long as the financial and social impact is increasing.

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COFACE ROMANIA CREDIT MANAGEMENT SERVICES S.R.L.

IANCU GUDA

IANCU GUDA

SERVICES DIRECTOR at COFACE ROMANIA CREDIT MANAGEMENT SERVICES S.R.L.

Although Romania is reporting one of the fastest GDP growth within the EU (1.6% in Q1-2016 QoQ and 4.2% YoY) amid a general stable macroeconomic outlook, the private business is lagging behind in terms of real economic convergence (low competitiveness due to modest productivity and product quality). The mismatch between the macroeconomic and microeconomic frameworks is driven by the economic growth model based on consumption (financed through credit and triggering imports) and external demand coming from the EU (highly concentrated in the automotive and chemical sector). Thus, as compared to the developed countries where the economic growth is internally driven from bottom – top (industrial production fueled by innovative capex, increasing employment and export growth), Romania’s economic growth model is dependent on private consumption (highly influenced by new credits) and externally driven top-down growth (‘top’ related to external demand and weather conditions). Hence, the external top-down growth is very fragile (highly dependent on the external environment) with sluggish spillover beneficial effects on the microeconomic level.


This is explaining much of the microeconomic imbalances of the private companies featured by modest payment behavior. In this respect, the analysis of the insolvency trends signals important concerns related to the systemic risk in Romania: less insolvent companies coupled with greater financial impact, modest entrepreneurial attitude, limited financial education of management in terms of credit risk management, payment deterioration among private companies. This is based on the following five principal findings detailed next.

 

 

Decreasing insolvencies … triggering higher financial and social losses

 

Although new insolvencies opened in Romania during 2015 decreased by 50% as compared to the previous year, almost 95% of the decrease is reported among small companies (without financials published for three consecutive years, or in the case any financials have been submitted, the turnover was zero or below EUR 100 K). Therefore, we have less insolvent companies among the small businesses. Nevertheless, the overall financial and social impact caused by the insolvent companies is increasing.

 

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