Romania - Navigating Through the Financial Storm

Aprilie 2009

LUCIAN ANGHEL - Chief Economist BANCA COMERCIALĂ ROMÂNĂ S.A.

Romania saw last year one of the fastest economic growth in EU27 advancing 7.1%, amid intensifying international financial crisis which led to an important slowdown in the last quarter (+2.9% y/y). Domestic demand stood again behind the economic growth in 2008 strongly supported by private consumption and gross fixed capital formation which grew by 8% and 19% respectively.

However, this year could bring a different picture with economy likely to contract but maintaining an average growth differential of around 2pp above Eurozone.

 

Romania remained an attractive playground for investors in 2008 despite international crisis

Romania stirred investors’ interest even during crisis. The business climate improvement in the recent years as well as the legislation aligned to the Acquis Communautaire, including the stimulating taxation framework (flat tax of 16%) made Romania attractive for foreign investors that poured in last year more than EUR 9 bn representing FDIs (around 6.6% of GDP).

Romania ranked 1st in terms of labour costs, labour skills and potential productivity increase according to Ernst&Young in 2008, while the same survey emphasizes some weaknesses Romania should overcome: telecommunication infrastructure, transport and logistic infrastructure, social climate. Profit margins have consistently increased in Romania, while dividend repatriation spiked in the last 5 years.

This shows that the local market has still significant growth potential and long-term investors (especially those in the real economy) seem to have known that, as they continued to inject substantial amounts of funds as FDIs in Romania even in a pretty difficult year such as 2008.

However, risk sentiment towards Romania is anything but good right now (CDS for 5Y T-bonds spread at more than 500) and it has remained low since S&P downgraded the country’s rating to non-investment (BB+) in late October 2008. This, coupled with limited external borrowings, amid much lower support from the domestic credit market, will negatively impact the real economy, particularly the manufacturing industry, construction and agriculture.

Although there is little chance for the overall economic situation to improve in the short run, Romania remains basically a good option for foreign investors and, most importantly, a country that can heavily rely on its own natural resources (the energy dependency rate¹ in Romania is roughly 29%, while in the EU27 it stands at 54%). [¹ Energy dependency shows the extent to which an economy relies upon imports in order to meet its energy needs. The indicator is calculated as net imports divided by the sum of gross inland energy consumption plus bunkers.]

The real economy claimed the largest part of the foreign inflows in 2008 – more than 80% – while the balance went to the financial sector. Even during troubled times, repositioning on the local market of some investors seeking to consolidate their market positions and prepare for times when profits are again rising should not be ruled out, while capital relocations could be driven primarily by the increased need to cut operational costs amid recession in the home markets.

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