Foreign investors plot Romania’s 2012 economic map

Romania has taken some of Europe’s toughest austerity measures in the last two years, and the process is ongoing. However, the lack of any stimulus for companies may cripple the economic growth of 2 percent forecast for 2012, although the flexible workforce could prove to be a valuable asset. These were among the pronouncements made by members of the foreign investors’ community who gathered last week at the Foreign Investors Forum organized by Business Review.

Ovidiu Posirca

Florin Pogonaru, chairman of the Association of Romanian Businesspeople (AOAR), acknowledged that Romania has been able to implement difficult measures, such as the 25 percent reduction in salaries for public workers, but lacks the ability to do the easy things. “The 5 percent VAT increase should have gone hand in hand with a 3 percent reduction in CAS, (employer contributions for social insurance). The CAS reduction could have given an advantage to local firms,” he said. Pogonaru added that Romania has remained mired in austerity in order to please others, and that the government is paying little attention to the problems facing the business environment.

“As the Austrian Central Bank recently announced its intention to cut financing for the Romanian subsidiaries of Austrian banks, Romanian companies are already starting to have issues in taking out loans,” he commented. The association chairman believes that following the announcement of the Austrian Central Bank, the authorities should have gone to Brussels to discuss state aid for Romanian companies. This could be done by recapitalizing Romania’s CEC Bank which could then provide loans to small companies.

Cost of lending to increase
“At present, not only countries, but also financial systems are under pressure, partly through their own fault, but also because they believed in the sovereign risk,” said Dan Pascariu, president of the supervisory board at UniCredit Tiriac Bank. He expects most European banks to increase capital in the next year. The UniCredit group recently announced a EUR 7.5 billion capital increase for the first half of 2012. Pascariu predicts recapitalization and liquidity problems in the banking sector for next year. “The liquidity will become precarious and more expensive, and here I am not talking only about Romania, but also at European level.” The UniCredit representative added that a significant number of the Romanian subsidiaries of foreign banks have taken out more loans in foreign currency than they have attracted deposits, the reverse of the situation in the local currency, the RON. He forecasts that interest on loans will increase in the coming period, as the quantity of available deposits has increased by only 5 percent in the last three years, although the losses in the banking system have become more pronounced.

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The UniCredit president added that in the last three years, since the start of the crisis, demand for credit from retail clients and the corporate sector has dropped dramatically, mainly due to  plummeting consumption. However, lending for working capital has remained stable. Pescariu also noted that loan demand from retail clients had dropped by 90 percent from October 2008.

“I am expecting the foreign currency resources from international sources to fall a little, but internal resources in RON will exist. Personally, I believe that foreign currency and RON interest will move more into line with each other,” added Pescariu. He also predicted that loans would become more expensive. “The external loan will become scarce and expensive. I believe that there are internal resources for increasing credit growth and I also believe that Western banks, despite what the Austrian governor says, will find ways to place money where there is the largest yield compared to risk.”

Government should pay companies on time
Saulo Spaolanse, general manager of Schneider Electric, a supplier of energy efficiency solutions, said that local entrepreneurs would benefit if the government paid for commissioned projects on time. Tim Smith, head of EMEA trade credit practice at Marsh, took up this theme, arguing that regardless of legislation and lobbying from companies, governments seldom do so. “Even in Germany, the government doesn’t pay on time, and corporates don’t pay on time either,” added Smith. Pescariu suggested the government set up a debt registry, with certain terms relating to maturity, up to which it can make payments. This commitment should facilitate lending to finance companies, as there will be greater assurance that at some point the money will be recovered by banks. “The debts that companies have to other companies or to the state should be tradable,” added Pescariu. This measure could also help the government in dealing with the mountain of arrears it has currently run up.

Pogonaru also mentioned Ford and other multinationals as the main beneficiaries of bulk funding from the EU, not structural funds, and said there was not a legal mechanism granting EU financial assistance to SMEs. He noted that the Romanian economy is 70 percent made up of multinationals and foreign capital, while the other 30 percent, excluding the energy companies, consists of small Romanian firms that lack the financial power to access new markets.

Kurt Weber, managing director at Horvath & Partners Management Consultants, acknowledged Romania has done its homework in many areas but further effort is needed on the liberalization of energy markets: the sector needs privatization, and the private managers assigned by the Romanian authorities to head state-owned enterprises (SOEs) will need private shareholders. He added that the liberalization of energy prices will attract investors. On the same theme, Spaolanse said he saw no reason why the state should keep allocating resources to badly managed SOEs.

Flexible human capital
Pogonaru argued that Romania’s competitive advantage is the flexibility of its workforce, but that training could be significantly improved. “The government should focus more on vocational training, which is one of the key developers of Romania’s economy.” On the same theme, Weber added that Romania could become an “India of the EU,” as its human resources are suited to customer service, customer care and IT consultancy. The general manager of Schneider added that the expat community in Romania agrees that the country has people with good technical and learning skills.

He mentioned that Schneider Electric Romania had recently opened a new customer relations center for its IT division, hiring 45 people and providing support in 12 languages. Weber concluded that investors should investigate agriculture, tourism, oil and gas. The untapped hydro energy resources could also represent a safe investment. Romania is well positioned between the East and West and could become a serious trader between the two regions.

ovidiu.posirca@business-review.ro

State must dos

3 percent reduction of the CAS, contributions that employers have to pay for social insurance, as a reaction to the 5 percent increase of VAT to 24 percent.

Increasing lobby activities for Romania’s economic interest at a European level and improved negotiation power.

Stimulating lending in the local currency (RON) as the financial system will have less liquidity at its disposal.

The setting up of a debt registry by the Romanian government in order to reduce the level of arrears.

The liberalization of the energy market and bolstering the production of green and efficient energy.

The introduction of the total cost of ownership criteria in public tenders.

Enforcement of the fiscal responsibility law and greater transparency.

Larger investments in vocational education/training.

The setting of industrial policies. The panel mentioned sectors such as agriculture, tourism, oil & gas, hydro energy, trade and outsourcing.

More transparency in the activity of the government.

The appointment of private management for authorities that are handling EU-funded projects.

Improved efficiency for commercial representations of Romanian companies abroad.