BR Analysis. Romania heading towards the EUR 5 bln foreign investment target

The flow of foreign direct investment (FDI) into Romania might break the EUR 5 billion milestone in 2019, potentially reaching a sum that hasn’t been seen in more than a decade. In terms of sectors with high potential to drive new investment, every industry linked to the growth of private consumption is set to remain on the radar of international investors.

By Ovidiu Posirca

The manufacturing sector already attracted some EUR 1.2 billion worth of FDI in 2017, mostly in the petrochemical and transport fields, according to the National Bank of Romania (BNR). Most of the share capital increases, also accounted for in the FDI statistics, were in the construction and real estate sectors (EUR 800 million).

“Looking at the Romanian FDI stock and its components, we see that almost half of all FDI has been in the industrial sector (FIC report regarding FDI in Romania, 2017). These investments are long term and capital intensive which should have dispelled the myth/rumors of ‘Romania’s deindustrialization’,” representatives of the Foreign Investors’ Council told BR. FIC members employ around 200,000 people in Romania.

The association cites automotive, agriculture and IT among industries with high growth potential, while the biotech industry also has room to grow.

Romania has sectors which are competitive at regional and global levels, are integrated into international production chains and export high quality products, said the FIC.

Potential for EUR 5 billion

For the first eight months of 2018, FDI flows fell by around 3.1 percent to EUR 2.8 billion compared to the same period of last year.

Globally, FDI fell by 41 percent to USD 470 billion in the first six months of the year, according to the preliminary figures from the United Nations trade and development agency UNCTAD. This was the lowest amount since 2005 and the fall was triggered by US president Donald Trump’s American tax reforms. US firms have repatriated a net USD 217 billion from foreign affiliates following the major fiscal change.

Locally, the amount of foreign investments has being growing steadily in the past few years, but flows haven’t recovered to the levels recorded a decade ago, when they reached a record USD 9.5 billion. In 2017, FDI amounted to EUR 4.8 billion and this year’s result is set to remain broadly the same.

“Considering the last two-three years’ trend, the FIC believes it is possible for FDI flows to grow slightly above the EUR 5 billion threshold in 2019; however, this could change if the European or global economy enters a downturn or if current investors find themselves facing increasing lack of predictability in the design and application of public policies,” said representatives of the FIC.

At end-2017, the FDI stock in Romania amounted to EUR 75.85 billion, of which EUR 52.75 billion was equity stakes, including reinvested earnings, and EUR 23.1 billion net credit from foreign investors.

The top five countries by share of FDI stock at end-2017 were the Netherlands (25.9 percent of the FDI stock), Germany (12.8 percent), Austria (12.6 percent), Italy (6.2 percent) and France (6.2 percent).

Capital captures the most FDI

From a territorial point of view, FDI went mainly to the Bucharest–Ilfov region (60.3 percent). Other development regions which attracted significant FDI inflows were the center (8.9 percent), west (8.5 percent), south-Muntenia (6.3 percent), and north-west (5.6 percent).

Foreign direct investment is considered a long-term investment relationship between a resident and a foreign entity, usually involving significant influence exerted by the investor on the management of the local enterprise.

“The activity of direct investment enterprises as a whole has had a positive impact on Romania’s foreign trade, their contribution to total exports and total imports of goods standing at 73.4 percent and 66.0 percent respectively,” the Romanian central bank said in a recent report.

At the same time, direct investment enterprises account for 53.0 percent of exports of services and 48.0 percent of imports thereof.

Romania remains attractive investment market in CEE despite challenges

The competitiveness of the local economy has remained largely unchanged in 2018 compared to last year, judging by the World Economic Forum ranking which tracks 140 economies. Romania was in 52nd position, while neighboring Bulgaria and Hungary were ahead at numbers 51 and 48, respectively.

The international report notes that Romania’s 10-year average annual GDP growth stood at 2.4 percent, while its 5-year average FDI inward flow accounted for 2.1 percent of GDP. In the business dynamism pillar, for instance, the local economy came 9th out of 140 for the cost of starting a business. In the attitudes towards entrepreneurial risk, Romania was in 125th spot.

“After a period of slight uncertainty for one or two years, we have recently seen an uptake in investment interest in the market: There have been several takeovers, mergers and new factory openings, which were mainly expansions of current facilities or newly established branch offices in so far untapped geographical areas,” Gerd Bommer, commercial counselor at Advantage Austria, told BR.

He says that overall investment by Austrian companies in Romania has reached EUR 9.58 billion, equaling 12.6 percent of total FDI in Romania.

Historically, Austrians have remained some of the most active foreign investors in the local economy, alongside the Dutch, Germans, French and Americans.

Bommer says that the Austrians are mainly investing in the expansion and modernization of existing capacities, which means that they have remained committed to the local economy.

“Romania, however, still has room for improvement in certain sectors, increasing its attractiveness as an investment location. Investment decisions are based on long-term planning and strategic development, which are significantly influenced by confidence in the acting government and the predictability of the country’s direction of development. Trust in political stability as well as reliability and predictability of political decisions are of the utmost importance for international investors,” said Bommer. He adds that cutting red tape, workforce development and reform of the education sector are other areas in which decision-makers can act to support private sector growth.

The availability of adequate workforce remains one of the biggest challenges for local and foreign companies, with an unemployment rate of 4.3 percent. For months, the jobless total has hovered around decades-low rates.

“Tensions on the labor market have increased since the unemployment rate reached minimum levels and the number of vacancies is continuing to increase. This will affect Romania’s competitiveness,” says the FIC.

Meanwhile, the FIC’s latest business sentiment index reveals that there is a continued dichotomy between FIC members’ expecting higher revenues and business growth in the short term, but being concerned about the lack of infrastructure and stability of the regulatory framework

“FDI flows grew by only 7 percent in 2017 compared to 2016, although it was a period of high economic growth. If we look over the figures, we will observe that in 2015 and 2016 Romania had economic growth rates of around 4 percent and an increase in FDI flows of 30-40 percent, while in 2017 Romania had 7 percent economic growth and a small increase in FDI flows,” said the organization representing foreign investors.

Meanwhile, the government has re-started in an amended version a state aid scheme designed to support investments. The most important change is that the minimum investment sum for which a company can ask for state aid has been lowered from EUR 10 million to EUR 3 million. This move aims to encourage more Romanian firms to ask for state assistance. By late September, there were 32 requests for state aid with projects amounting to RON 1.38 billion (EUR 295 million). Out of the total number of submitted funding requests, 18 came from firms with domestic capital and the rest from foreign players. The scheme can be used to fund greenfield investments or the expansion of current operations. The starting budget for this year is RON 614 million (around EUR 131 million).

Far from pre-crisis levels

FDI in Romania peaked just before the financial crisis, according to official data. In 2008, foreign companies made direct investments in Romania totaling EUR 9.5 billion, an all-time record, following investments of EUR 7.25 billion 2007 and EUR 9.1 billion in 2006.

In that period, the Romanian government was in the full process of privatizing big companies and banks, culminating with the sale of a 36.8 percent stake in BCR – Romania’s biggest bank at that time – to Austria’s Erste Group for EUR 2.2 billion.

But despite the poor financial health of many state-owned companies and overwhelming presence of the government in sectors like energy and transport, there are no plans for further privatizations in Romania.

According to a World Bank study released last year, FDI benefits developing countries, bringing in technical know-how, enhancing workforce skills, increasing productivity, generating business for local firms, and creating better-paying jobs.