Cautious optimism surrounds Romania’s growth outlook

Newsroom 23/11/2015 | 15:05

Three days of panel discussions with experts focusing on Romania’s macroeconomic performance and competitiveness outlook, debates centered around the five fastest growing sectors in the country, over 60 speakers and 450 participants – BR gives you the breakdown of the most important issues debated, as well as forecasts made, during the second edition of its Foreign Investors’ Summit.

 

Simona Bazavan

The numbers tell a compelling story. Romania reported ten quarters of growth out of the last twelve, and its GDP was up by 4.2 percent in Q1 y-o-y alone, making it the best performing economy in the European Union (EU), said Alexandru Nastase, secretary of state with the Department for Foreign Investments and Private Public Partnership. Subsequently, foreign direct investment (FDI) has posted a similarly positive evolution totaling a volume of almost EUR 2.3 billion in the first eight months of 2015, 61 percent higher than the same period in 2014, he added. All this means that “there is no better time for investing in Romania,” went on the official.

But where does this growth come from and is it sustainable? Moreover, are the right conditions in place for FDI to go up even further? Talking about the country’s macroeconomic performance over the past couple of years, Angela Filote, chief of representation of the EC in Romania said that, while there was consistent growth, it was fueled by internal consumption and exports and less by public investments. “It is true that Romania has had amazing economic growth but let’s look at the source of this growth. One of the reasons for which Romania had low budgetary deficit was based on low investments. And the country cannot grow solely on local consumption and exports because these were the main sources of its economic growth,” commented Filote.

And such investments are vital given the country’s need to develop and upgrade its infrastructure in almost every sector, she added. “Eachone of us who travels through this country knows how instrumental, I would say how ultimate, the need for proper infrastructure is. Starting with the transport infrastructure, but almost in any other field, we need investments in infrastructure,” explained the European official. And she was not the only one to point this out. “What is probably missing from the equation in order to make this growth truly sustainable, are the public investments,” commented Anamaria Mihaescu, the regional manager of the IFC, part of the World Bank Group.

Even so, boosting investments at the price of increasing the public deficit ceiling would be the wrong approach, warned Filote.

“We would see no reason to accept a trade-off between investments and the public deficit, before we see the country making use of all the other available measures. This includes accessing structural funds or the improvement of tax collection. Romania already has the means to increase its capacity to attract foreign investments and it doesn’t need to touch the macroeconomic fundamentals that were achieved through such hardships,” added Filote.

She also commented on recent news about the Romanian authorities’ intention to reach a new agreement with the IMF/EC by saying that she heard about it from the media and that the EC has not been officially approached for discussions. Stressing however, that, even without a new agreement being signed, the EC has the necessary instruments to keep fiscal consolidation in check. “Romania is part of the economic governance structures ofthe EU and we have a system of monitoring and of issuing recommendations,” added Filote.

Romania’s efforts to boost foreign investments must also be seen in the larger European context which could offer the country new perspectives for growth, discussed panelists. Compared to the pre-crisis levels, the EU has an investment gap of over EUR 300 billion. In order to address this issue, the EU has come up with the Investment Plan for Europe, a program that targets the mobilization of some EUR 350 billion in investments over the next years. “We are trying to fill this gap. It is a kind of bet, a challenge that we are throwing into the market, hoping that the private market, the investors will follow,” said Filote.

Weak investments across the continent are holding back the European economy and are leading to a sluggish recovery and little change in the high unemployment levels. “Our first and utmostpriority is to create jobs in the EU. As you know, the EU has 28 member state, but the crisis has created a 29th member state which is the member state of the unemployed; we have 25 million people that cannot find a job in the EU. And this is not something we can afford,” said the official.

The Investment Plan for Europe, the efforts to create an energy union, the completion of the single market that would enable the creation of a fully functional digital market – all these are initiatives looking to create more jobs in Europe and are possible growth engines for Romania as well, argued panelists.

However, maintaining macroeconomic stability remains a key element for future investments of any kind. What presently advocates Romania to foreign investors are its macroeconomic growth and stability, mainly the result of three financial programs with the International Monetary Fund (IMF), the World Bank (WB) and the EC, said Filote. “And all this success was not easily achieved. It was a huge effort for the country, for companies, entrepreneurs and ordinary citizens. And what we wouldn’t like to see, are these achievements get undermined by other types of measures,” she added, hinting at the recent fiscal relaxation and public wage increases announced by the Ponta government.

 

Worrying signs

The European Commission (EC) is less optimistic than the Romanian government about the country’s tax collection capacity in light of the recent tax cuts, pointed out Filote.

“We have an optimistic government and that is a good thing; we only hope that it is not too optimistic. We are less optimistic about the government’s capacity to increase tax collection so that it can compensate for recently adopted fiscal measures (…) It would be a pity if, after such fiscal discipline and such strong austerity measures that everybody felt, we were to take a step back,” said Filote.

She stressed that the EC is not against fiscal relaxation but that such measures need to be well-timed and implemented properly. “We are looking at every measure of this type. Why? We are not against such measures. We are in favor of all these measures if they are taken at the right time and with the right compensatory measures so that what this country has achieved and made it such a great country to invest in is preserved and that the investments keep coming,” she stressed.

 

Romania needs privatization and EU funds to accelerate growth, says Mark Mobius

Privatization of state-owned companies and accessing EU funds are the two things that would help Romania accelerate growth, said Mark Mobius, executive chairman of Templeton Emerging Markets Group, during the first day of the event.

“Privatization is the number one thing that should be done. We are now in a situation when we have these huge state-owned enterprises which are still majority-owned by the government and are therefore not willing to change, not willing to reform, not willing to become more efficient and not willing to become more profitable. Privatization would bring money to the country but more importantly, it would increase the productivity, resulting in a much more productive economy,” he explained.

He added that, although he understands that this is not an easy process and that there are political issues that go hand-in-hand, accomplishing this goal would help get the economy moving.

Accessing EU funds should be the second priority, he recommended. “Romania has a lot of money in Brussels waiting to be spent. And you have to ask the question why it is that you have this money and it isn’t being used? Again, it is a government issue, a political issue. How can we get politicians together to agree to pursue very important infrastructure projects? Infrastructure means growth for this country,” said the businessman.

 

The ever-missing infrastructure

Romania has made considerable progress over the past years in creating an investor-friendly business environment, but there is still work to be done, argued panelists. “There are three directions Romania needs to focus on in order to attract more investments: improve the business environment, improve infrastructure and improve good governance,” said Ismail Radwan, lead public sector management specialist with World Bank Romania.

Of the three, infrastructure development, and road infrastructure in particular, has proven the trickiest and most elusive goal to achieve for Romanian authorities so far. According to WB estimates, Romania needs some EUR 16 million to develop its road infrastructure, out of which only EUR 4 billion is available in EU funds between 2014 and 2020. Absorbing the existing funds and finding alternative financing sources thus becomes crucial, stressed Radwan. Romania could also learn from the experience other countries have with public-private partnerships in order to speed up the roll out of large infrastructure projects, such as the construction of highways, said Ioana Anca Gheorghiade, executive director public sector and infrastructure funding with BCR.

 

What else beyond low costs?

Low costs, location and energy resources are the main three reasons that make Romania attractive for investors according to the EC data. “Out of these, I have a problem with the low costs. I don’t think Romania can afford having as one of its main advantages the low costs. And I don’t think it is fair to Romanians,” commented Filote.

There is increasing and understandable pressure to raise salaries, however, this must be the result of increased productivity and competitiveness, which in turn are the result of investments in medium- and high-value-added technologies, she added. The Romanian economy is dominated by low- to medium-tech sectors with several high-tech “islands” but, even the latter do not invest enough in research & development (R&D) and innovation, according to EC data. “R&D has been identified at the EU level as the engine of change for improving competitiveness. It is a problem across the EU,but even more so in Romania,” said the chief of the EC in Romania.

The challenge for Romanian authorities is to come up with a model that would enable salary increases without losing the country’s attractiveness for multinationals and foreign investors in general, she added. “That means that wages must go up responsibly in-line with productivity. Romania must focus on structural policies for improving productivity, with a view of restoring competitiveness. And this is the main challenge for the medium and long term, according to our assessment. It requires transition to sectors with high technologies and value-added because Romania needs to find shortcuts in order to catch up with more developed economies in the EU, which are themselves in a continuous process of development,” concluded Filote.

And this has already started to happen, according to some investors. “Times are changing here in Romania because we can no longer rely on competitive low costs. This is no longer the case. And we can also no longer rely on a strong domestic market. This means we need to look for higher value-added activities,” explained Nicolas Maure, general manager, Dacia Renault Romania.

IT and telecom in particular are sectors that can boast a well-trained and competitive workforce, said company representatives. “That fact that we export workforce within the Vodafone group is proof that that we have highly competitive, technologically-trained employees,” said Valentin Stefan, the director of business development at Vodafone Romania.

 

Car industry calls for labor code flexibility

Modifying the present labor code and introducing new measures that would make it less flexible than its present form is worrying investors, discussed participants during the event.

“I am particularly worried by the intention to modify the labor code. This intention is tacitly passed through Senate. It would be a terrible setback for progress in the industry,” said Constantin Stroe, the president of the Romanian Association of Car Producers – ACAROM. Some of the possible changes that could be brought to the labor code include the reintroduction of collective labor agreements, increasing the cost of overtime from 75 percent to 175 percent and setting individual performance targets through collective negotiations, explained Stroe.

Investors, too, have expressed concerns over a possible change of the labor code. “Labor costs are increasing in Romania. It is still competitive, but it will be converging gradually to Western European levels. So the only way to compensate this is to bring added value and to keep flexibility. The current labor code that was implemented starting 2011 is a good one (…). It would be extremely risky to challenge this and to introduce a new labor code without the proper dialogue taking place between employers, the unions and the civil society,” said Maure.

The availability of local labor force and its qualification remains one of the most important criteria when a company looks at setting up manufacturing facilities in Romania, stressed Dana Bordei, the head of the industrial department of CBRE.

Car industry representatives have also talked about the need for more government support for the domestic new cars’ market.

Romania’s First Car program does little to boost new car sales as it offers potential buyers the same terms as regular loans, said Stroe. “Romania is importing three used cars for every new car being sold. It is crucial to find ways to restart the domestic market,” added Maure.

The government-backed First Car program is meant to stimulate new car acquisitions but producers say it should be changed to increase the lending period beyond five years and offer lower interest rates. Such measures are crucial to support the market given that lowering the VAT from 24 percent to 20 percent would have little effect to boost new car sales, added Stroe.

“We have a very weak market for new cars. It is absolutely abnormal to have two producers like Renault and Ford sell only about 6 percent of their production in Romania. Imagine that if they wouldn’t export, they would need to keep production units working for only two weeks per year” went on Stroe.

Increasing the financing capacity of the Rabla program (“Cash for Clunkers”) would also help stimulate new car sales, a much needed measure given that there are over 3.5 million cars in the country that are over eight years old, added Maure.

 

Not yet a regional energy hub

Romania could “in theory” evolve into a regional energy hub and it could play an important part in the EU’s Energy Union project, given its conventional energy resources and green energy potential, said Daniela Lulache, CEO at Nuclearelectrica. However, low levels of interconnection and low electricity prices are hindering this potential, she explained.

“Even if we assume that we don’t have a market problem, then we definitely have a regulation problem. It is a reality of the EU that electricity prices are low and this makes any large scale investment project unsustainable,” she explained.  She added that Romania can be independent from the oil and gas perspective as it is the only country in EU that benefits from an integrated nuclear energy production cycle from uranium mines to production.

Speaking about the potential of the local energy market Artur Stratan, president of ROPEPCA said that Romania needs massive investments in both production and exploration fields. According to him, about EUR 8.5 billion have been invested in Romania in the two sectors in the past 12 years. Also Martin Zmelik, CEO at CEZ Romania Group said that there are a lot of opportunities in the distribution sector in terms of more complex solutions for customers. “But it is also important to provide more complex products in the electricity sector. Our main directions are represented by solutions in distribution and new technologies around renewables,” he said.

And indeed, new technologies are boosting growth throughout the industry, from production to final consumers, added Daniel Bobu, director, enterprise marketing, enterprise business unit at Vodafone Romania.

 

Agricultural productivity increases but still below potential, say investors

Romania has taken concrete steps towards improving its agricultural productivity over the past years, albeit progress remains slow, discussed participants at the agriculture conference.

One problem that continues to hinder productivity is land fragmentation, said George Turtoi, state secretary with the Ministry of Agriculture and Rural Development. “About 80 percent of the country’s farmland is divided among farmers who own between one and five hectares. There are some 800,000 such farmers,” he said. With the new National Program for Rural Development (NPRD) and new rules for allocating subventions, the authorities are hoping to change this by offering farmers incentives to create and join cooperatives and producer groups. Such measures include offering a subsidy level higher by EUR 45/hectare for farms or associations that own between five and 30 hectares, said the official. Farmers who opt to join forces in such an association also benefit from 20 percent more funding for investments and dedicated application procedures in the NPRD for 2014-2020, went on Turtoi.

Until some of these measures produce effects, land fragmentation remains a problem for both local and foreign investors. “It is very hard to explain to an investor who is looking to buy 5,000 hectares, 10,000 hectares or 20,000 hectares of farmland that this land will be scattered across several villages,” said Mihai Macelaru, associated partner with Noerr.

Despite such setbacks, more and more entrepreneurs and companies are venturing to invest in farming businesses and banks are more willing to cater to their financing needs.  “Why are banks investing now in agriculture and why more than before? It is not something that we have discovered overnight. What has happened is that business people are starting to capitalize on the existing potential. Therefore, it is only normal for banks to make their presence increasingly more felt,” explained Dan Bota, head of the small business division with Intesa Sanpaolo Bank.

With financing becoming more available, the industry is projected to step up its growth by enabling farmers to have an integrated approach to production and thus boost productivity. “In order to post yields that are higher than the average of about four to five tons per hectare reported presently for crop production, and reach at least seven, eight tons per hectare, one needs to focus on all the inputs involved in the process,” said George Stanson, business manager for Romania, Bulgaria, Croatia and Serbia with Case IH & Steyer Balkans.

Increased productivity, accompanied by the creation of local value-added production chains would enable more and more farmers to reach the shelves of large retail chains, argued participants. For example, some 98 percent of the private label grocery products that Carrefour sells in Romania are produced locally, says the retailer. “We are working with more than 780 local producers who supply us mostly with fruit, vegetables and traditional products,” said Florin Capatana, director corporate affairs & sustainable development, Carrefour Romania.

Such progress remains slow, but there are positive developments in the industry, argued participants. “We see a very encouraging change. If things will continue in the same direction, in 2020 we will probably be able to talk less about potential,” concluded Stanson.

 

Limited pipeline to cap 2016 real estate investment volume

One of the hardest hit sectors in the aftermath of the 2008-2009 financial crisis, the real estate industry, has resumed growth and is once again on investors’ radar. All real estate segments have gone up over the past 12 months, said industry representatives. Office in particular,but the industrial and logistics markets, have all been posting positive results, pointed out Florin Furdui, the country manager of Portland Trust.

In the retail segment, consumption has also been going up, and developers are ready to cater to new demand, said Tal Roma, business development manager, Afi Europe Romania, stressing however, that optimism should remain cautious. Even the residential market has been resuming growth. “It has clearly overcome its lowest point and it is now on an upward trend,” commented Adrian Erimescu, the co-founder and CEO of online real estate platform Imobiliare.ro.

After real estate investments totaled some EUR 950 million in 2014, this year the volume is expected to reach approximately EUR 800 million – EUR 850 million, said Laurentiu Lazar, the director of investment and valuation services at Colliers International Romania. However, it is hard to make forecasts beyond 2015, argued real estate panelists.

“I am less optimistic for 2016 because I don’t see the necessary pipeline for such transactions. It is there, but it less obvious than the 2015 volume was, back in 2014,” explained Francisc Peli, partner with the Peli Filip law firm.

The average transaction value has changed, and investors are presently interested in deals of about EUR 30 million – EUR 40 million, said Lazar. “There aren’t really that many products left on the office market, and on the industrial segment there are even fewer,” he added.

And the industrial segment in particular has seen a considerable number of investment transactions over the past year as the market has posted overall improved results. 2015 has been “a very interesting year” for the industrial and logistics segments, with the leasing activity projected to reach 300,000 sqm – 350,000 sqm by yearend; however, much of this year’s results were the result of projects that were kick started as far back as two years ago, said Marian Orzu, business development executive with the industrial agency of CBRE Romania. “If before the crisis the negotiation time for closing a transaction was of about three to four months, now it takes at least six months and can take as long as two years. This is why on the industrial market we see a really good year sometimes followed by a more regular one in terms of performance,” he explained.

Nevertheless, the overall optimism about the industry needs to be moderate in order to make sure that past mistakes will not be repeated, argued participants.

“I, too, am optimistic about the real estate market, but I do have some reservations. They have to do with the fact that we find ourselves in a period when there suddenly is a lot of money available and investors, who have been frustrated for years because they lacked the resources to develop their projects, are now able to do that. I am concerned, however, that not all of them ask themselves if there is demand for those projects and that we will once again begin a cycle when we hurry things up and we skip steps,” warned real estate entrepreneur Ovidiu Sandor.

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