Romania - Transition Report 2007
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Martie 2008 |
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CLAUDIA PENDRED - Director Romania
THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT |
Adresa
Bulevardul Iancu de Hunedoara, Nr. 56-60
Cladirea Metropolis Center, aripa de vest, Etaj 3
011745 Bucuresti, Sector 1
Telefon
+40-21-202.71.00
Fax
+40-21-202.71.10
Website
www.ebrd.com
www.ebrd.ro
CLAUDIA PENDRED
Director Romania
BANCA EUROPEANA PENTRU RECONSTRUCTIE SI DEZVOLTARE
Romania - transition report 2007
Key challenges
• International competition and skilled labour shortages are squeezing traditional industries while demand shifts to higher quality products and services. Better governance and enforcement of regulations is needed to support necessary corporate restructuring.
• Integration into European production networks is hampered by infrastructure bottlenecks. The necessary modernisation of the road network can only be achieved by rapidly improving the framework for private sector investment and employing EU structural funds more effectively.
• Macroeconomic imbalances associated with domestic demand pressures and rapid growth in credit call for far more prudent fiscal and income policies to mitigate vulnerabilities.
Progress in structural reform
Business environment and competition
Competition from the single market has highlighted the urgent need to restructure many local companies. It is also contributing to structural changes in the economy. Those industries that have until now relied on cheap labour are moving out of Romania and being replaced by companies producing higher value added products and services and relying on skilled labour. The main constraints on this trend are labour migration and lack of capital and know-how.
The European Commission (EC) identified judicial reform and corruption as two areas of concern prior to EU accession. The first post-accession EC monitoring report in June 2007 concluded that progress had been made in these areas but that efforts needed to be stepped up. Romania has made progress in reforming the judiciary, as shown by the establishment of coherent jurisprudence, but reforms to staffing and organisation are lagging. Romania has intensified its fight against corruption by setting up a National Integrity Agency, expected to begin operations by October 2007, and by continuing with processing high level corruption cases. However, the EC report notes that, overall, “progress in the judicial treatment of high-level corruption is still insufficient”. The decriminalisation of bank fraud in 2007 and the number of replacements and resignations of key officials at the Ministry of Justice have cast a shadow over the progress that has been made.
Infrastructure
The government has started implementing its ambitious programme of building more than 1,300 km of highways and express roads by 2013. However, all past attempts to use public private partnership (PPP) structures have failed and poor utilisation of the available structural funds for this programme is limiting the speed at which it can be implemented. EU funding will be used to complete only one major project in the short term – the Pan-European Corridor IV. This relatively slow pace of reform may constrain economic growth.
Privatisation in the energy sector is progressing, with five of the eight power distribution companies in private hands. Plans to privatise generation and the remaining three distribution companies also exist but have not yet been finalised. Since 2001, some 75% of the gas market has been opened to competition, with eligible industrial consumers able to choose their supplier. Domestic gas prices have not yet been brought into line with international prices.
Evidence from the EBRD/World Bank Life in Transition Survey suggests that access to public services other than electricity is strongly linked to income levels – only 68% of the population has access to a water supply, 52% has access to sewerage and 70% has access to solid waste management. The environmental upgrades required to meet EU standards are estimated at EUR 30 billion during 2004-15, a large proportion of which are to be funded by municipalities.
Financial sector
Privatisation in the banking sector is nearing completion. However, the privatisation of “Casa de Economii si Consemnatiuni” (CEC) bank has been postponed after the government rejected the sole bid submitted by the National Bank of Greece (NBG) because the offer price was too low.
Finance available to enterprises is mostly debt finance (bank loans and, to a very small degree, corporate bonds). The Bucharest Stock Exchange (BSE) has grown rapidly with a market capitalisation of EUR 32 billion, with another EUR 8.7 billion capitalisation of the over-the-counter market by the end of July 2007. Yet the number of bonds traded and IPOs executed in the last two years remains small, and the BSE is still not a major source of finance for industrial investment.
Social sector
Pension reforms, which include the introduction of a three pillar model, have progressed. The second pillar will be introduced in January 2008. Since July 2007 the Commission for Supervision of the Private Pension System awarded licences to 17 companies operating as private pension funds that invest mandatory pension contributions from employees younger than 35.
Macroeconomic performance
Economic growth remained strong in the run-up to, and after, EU accession, with growth rates of 7.7% in 2006 and 6% in the first quarter of 2007 (year-on-year). The rate of inflation fell to 3.8% in June 2007 from 4.9% at the end of 2006 (and from 8.6% at the end of 2005) but picked up to 5% in August 2007 due to higher food prices. However, administrative price adjustments have not yet been completed.
Growth has largely been driven by strong domestic demand from several sources. Lax incomes policy, as evidenced by an 18% increase in the minimum wage and three rounds of public sector wage increases of up to an average of 20% approved for 2007, stimulated domestic demand. In parallel, a similar stimulus came from domestic credit growth of 52% in 2006. This was in spite of administrative measures that had been introduced to curb credit expansion, and which were subsequently phased out because of their distortive effect and replaced with tighter supervision and higher interest rates.
A further stimulus came from an expansionary fiscal policy. In 2006 the government initially targeted a budget deficit of 0.5% of GDP, but the outcome was actually a deficit of 1.9%, owing to a substantial spending increase in the last two months of the year (the budget ran a surplus of over 2% of GDP in the first 10 months of 2006). The general government deficit target for 2007 is 2.8% of GDP.
These demand pressures have contributed to a rapid increase in the trade deficit, with imports growing almost twice as fast as exports. This in turn has added to a widening of the current account deficit to EUR 10 billion (11.3% of GDP) at the end of 2006. The trend has continued during 2007 with the deficit reaching EUR 13.6 billion or 12.2% of GDP in June 2007 (on a 12-month rolling basis).
Much of the external deficit has been financed by FDI flows (external deficit coverage by FDI was in excess of 91% in 2006). However, future FDI flows are hard to predict given that EUR 2.2 billion out of total FDI flows of EUR 9.1 billion in 2006 were linked to privatisation revenues, which may not be as important soon because privatisation has virtually come to an end. FDI coverage of the external deficit in the first half of 2007 amounted to 38%.
Outlook and risks
Although short-term risks are low, lax fiscal and income policies increase the vulnerabilities of an economy going through significant structural changes. Policy-makers need to plan for the longer term in order to lay the foundations for future growth. Potentially, increased investment stimulated by EU accession in January 2007 and the completion of privatisation and enterprise restructuring can help to maintain strong economic growth. However, failure to develop physical infrastructure – in particular transport infrastructure – could act as a brake on this growth.
