The 8th edition of Business Review’s Foreign Investors Summit brought together representatives of large companies, consultants, legal advisors, and strategic investors on the Romanian market to debate key topics related to foreign investments and discuss the top concerns of people who do business in Romania.
By Aurel Constantin
The pandemic wiped out most of 2020’s global economic growth. And even though Romania was also hit hard by covid-19, the local economy performed better than its European peers last year and is expected to also outperform them in 2021, with an estimated growth of around 7 percent. Naturally, foreign direct investment (FDI) levels, which had already been stalling for several years, hit a record low, but as the new normal took over, we saw a steep growth of FDI in the first five months of 2021, of 320 percent.
The fiscal and monetary measures adopted by Romanian authorities to help businesses cope with the effects of the pandemic have certainly helped the recovery, and it seems that the local economy can still offer good opportunities for foreign investors. There are plenty of factors that make Romania an attractive destination for FDIs – consumption is on the rise, real estate yields are still good, and the local share trading market is growing. At the same time, we cannot overlook warning signs like the shortage of qualified workforce, rising energy prices, public debates over suspending fiscal facilities for key industries or even the everlasting political crisis.
All these things are having an impact on Romania’s competitiveness, one of the most important aspects that have to do with the attraction of foreign investors. In order to improve the country’s competitiveness, we must take a good look at the challenges and opportunities in front of us today, as Bogdan Ion, Country Managing Partner at EY Romania & Moldova and COO of EY South-East & Central Europe and Central Asia, noted in his opening statement at FIS 2021.
Romania’s present situation is far from ideal: we are simultaneously dealing with the critical issue of high mortality rates due to covid-19, a political crisis, and record-high energy prices. But regardless of today’s difficulties, we must still take a long-term view. One of the key questions is, how do we see ourselves competing as a country and what are the key drivers of growth? Should our growth model be primarily based on manufacturing or rather on services?
Romania seems to be expanding in both directions, just like Poland, which is a really positive development. Another good aspect is the high share of IT in our value-adding output, an area where we rank well. Romania’s competitive approach has mainly been based on cheap labour and technology adoption supported by foreign direct investments. In the context of economic convergence and increasing labour costs, these growth drivers are slowly being wiped out. Therefore, Romania needs to compete more on quality and less on low costs. Raising labour productivity is crucial, and this requires major improvements in the areas of education and healthcare. And we also know that more foreign direct investments could be attracted provided that the country’s institutional framework and infrastructure are improved.
Addressing the four areas where our country significantly underperforms would most likely lead to better technological absorption and generate further domestic investment and innovation, where we also score very low. According to the European Innovation Index, Romania is the least innovative EU country. We are lagging well behind the EU average in the vast majority of indicators, other than internet access, venture capital, medium and high tech exports, and sales of innovative products.
“Demography is also a huge long-term challenge. According to Eurostat, we might record a 37 percent drop in active population by 2060. We are placed towards the extreme end of this spectrum,” says Bogdan Ion.
Achieving a higher GDP per capita level based on a decreasing population is not something we want. Romania has a 44 percent gap with the EU in GDP per capita. “At the end of the day, this translates into significant potential for our country, especially if we look at the last 10 years, when we have consistently exceeded the EU’s average GDP economic growth rate,” said Ileana Gutu, Associate Partner for Economics and State Aid Services at EY Romania.
What Romania needs is sustainable growth, which may come through European funds, and we also have the capacity to absorb private investments, thanks to an extremely competitive overall tax rate. “Investors should be aware of the available state aid schemes and of those that might come next. And we can refer to two such schemes that are working very well already: one for major investments of over EUR 1,000,000 and another related to job creation, which is applicable when creating more than 100 jobs. I think they are very relevant and have already been proven to work,” Gutu added.
The Green Deal
According to Ramona Chiriac, Head of the European Commission Representation in Romania, foreign investors are important in generating robust growth for the Romanian economy. As this year’s summit was focused on better understanding where foreign direct investment stands and on addressing investors’ hopes and concerns, the EU-funded Recovery and Resilience Plan came up often as one of the biggest sources of hope. “Romania’s economic growth this year is estimated by the EU at 7.4 percent, outperforming other countries. For the growth to remain sustainable, it is important to ensure that it is supported by investments and reforms. The EU has made the necessary steps to disburse a total amount of EUR 29.2 billion to Romania by 2026, of which EUR 3.8 billion will be released in the pre-financing stage of the plan,” said Ramona Chiriac.
The plan is built on six pillars, from the green transition and digital transformation to economic, social, and territorial cohesion, health and institutional resilience, and policies for the next generation. The Green Deal can have a huge contribution to reaching the set targets of reducing 55 percent of greenhouse gas emissions by 2030 and reaching carbon neutrality by 2050. This creates a huge need for investment, and 41 percent of the investments laid out in Romania’s plan will be going towards green projects. EUR 1.8 billion will go to urban mobility for green transportation, while EUR 855 million will be allocated to renewable energy production.
The EU and the European Investment Bank may provide financial assistance and advisory services, but it remains Romania’s job to design its own future. “Romania must decide what it wants to look like in the future, what it can do to strengthen its economy, what types of investments it wants to attract in order to have a greener and more sustainable economy, and how it should try to obtain those investments,” said Lara Tassin Zanin, the Head of the European Investment Bank.
Romania also has plenty of opportunities related to the available transition and structural funds, and all of these should be used more in order to generate added value in the economy, which means that authorities must have a medium- and long-term vision in place.
Confidence in the economy
Poland and Hungary have so far been better than Romania at attracting foreign investments, therefore our country must develop a solid strategy. Various initiatives and projects are being carried out by different institutions, but a common vision is still missing. “We need a proactive approach in promoting Romania as an investment destination and we need to establish what Romania needs and what it can offer, and then promote it intensively in order to build a sustainable economy,” said Cristian Ilie, General Director at InvestRomania.
Since 2014, the Foreign Investment Council has been releasing reports about investors’ confidence in the economy. The latest one, from September 2021, showed that the economy seemed to be performing well overall, but there were three areas where things were not looking so good, Foreign Investment Council President Cristian Secosan explained. The first was the pandemic crisis, where the situation remains critical as the measures taken by the authorities came too late. As a result, many companies have postponed or cancelled development plans. The second was the political crisis, which seemed to have no end in sight. And the third was the energy crisis, as prices have risen to unprecedented levels. One of the causes of the rising prices is the lack of investment in the sector and the country’s inefficient production capacities. There are also factors that are out of Romania’s control, but there are still plenty of internal issues that we ought to address. Under these circumstances, confidence in the Romanian economy is currently at low levels.
Investments at the municipal level are just as important as national ones, as the development the cities can significantly improve citizens’ lives. An EIB report found that local investments have started to pick up the pace since 2017, with northern Europe recording higher levels than the southern parts of the continent. Before the covid crisis, EU municipalities made more investments in digital and social infrastructures and in climate change mitigation. But, as EIB Economist Patricia Wruuck pointed out, municipalities find that important gaps have remained, notably in terms of urban transport and digital infrastructures, as well as in the area of climate change mitigation and adaptation.
One area worth a closer look is the social infrastructure; about a third of municipalities are recording an investment gap in this area. Social housing, healthcare for children and the elderly, and the education system all need to be addressed in a more comprehensive manner. “Digging a bit deeper, we can see a difference in development among EU municipalities with large income gaps. This can be seen in housing conditions, but also in healthcare,” said Patricia Wruuck. After the pandemic hit, more local investments went towards digitalization and social infrastructure. But municipalities in the lesser developed regions tended to retain a greater focus on basic needs, such as urban infrastructure and utilities.
The European Union’s financial support helps address issues of access to finance, but governmental capacity remains key in making the most of these opportunities. Authorities must address regulatory barriers to investment, including those existing at the local level, in order to unlock economic transformation opportunities.
Education platform for entrepreneurs
In the last year and a half, digitalization has been visibly speeding up in the real estate sector. Buildings can now be controlled by computers and smartphones. Energy efficiency and health measures are also more important than ever inside buildings, whether we’re talking about offices or residential compounds. “The notion of a safe building acquired a new meaning once the covid-19 pandemic hit,” said Antoniu Vastint, Managing Director at Vastint Romania.
Digitalization is on the agenda of every company, including that of Mastercard, which is not just a payment provider, but a global technology company. Digitalization has a major impact on our lives, and that is why we need better IT&C education in schools. And the economic importance of digitalization was confirmed – albeit in an unfortunate manner – by the pandemic, as we experienced an urgent need for a shift between the offline and online modes. With the pandemic having strongly hit the hospitality sector, Mastercard has created a programme to help these businesses, called HoReCa Together. “It is an educational platform that provided all kinds of information, from global education tools to local best practices, and taught entrepreneurs how to digitalize their business and make sure that they can get through this period,” said Laura Stefan, Business Development Director at Mastercard Romania.
Healthcare – and hospitals more specifically – have naturally also attracted a lot of interest during the pandemic period. Over the past few years, there have been significant investments in the private healthcare sector, with many hospitals providing high quality services.
One critical aspect for a hospital is its power availability, and electrical systems in old hospital buildings are struggling to keep up with demand, which also generates major fire risks there have been significant investments in the private healthcare sector, with many hospitals providing high quality services.
The workforce is still troubled
When the pandemic hit and the economy virtually shut down for several months, many companies may have struggled to survive and keep their workforce, but they received the support they needed through state aid programmes. Being able to retain employees turned out to be very important, as when pandemic restrictions eased, the difficulties of finding new workers returned – and big investments are not possible without an adequate workforce.
A stable workforce is one of the pillars of a sustainable economy, and sustainability is on everyone’s minds today. For Romania, achieving economic sustainability is made possible by the funds available through the Recovery and Resilience Plan and the other EU structural funds. Sustainability plays a big part in the private sector as well, influencing the way companies choose their suppliers and partners. The guiding principle here is to prioritise local products.
Sustainability can also represent an opportunity for foreign investors, as it promotes a circular economy, which recycles and repurposes materials used in manufacturing processes. But there are many things that still need to be done in order to achieve sustainability in all economic sectors, and this translates to a great number of opportunities for investors.
Romania offers some of the best conditions and incentives for investors, thanks to its low taxes and high yields, and projects that foster sustainability and green development will receive significant support through a variety of state aid schemes for many years to come.