Romania battles Hungary for investment spotlight

With poor infrastructure and high levels of bureaucracy and corruption, Romania is still far from being foreign investors’ top target. But, for now at least, it has several advantages over its neighbor, Hungary. Bosch, DeLonghi and Tata Motors are some of the companies that have announced their intentions to invest in Romania.

Anda Sebesi

The whole of the continent is in a stew at the moment, as many countries in both Western and Eastern Europe are facing different economic difficulties and are struggling to get through them without incurring too much damage.

While the ratings agency Fitch recently downgraded five Euro zone states, Italy and Spain among them, Hungary is undergoing political and economic difficulties. And in Romania Emil Boc and his cabinet stepped down at the beginning of last week. In the midst of this political turmoil all countries are seeking to maintain their economic balance and improve their financial situation.

Herbert Stepic, general manager of Raiffeisen, said at the beginning of the year that Central and Eastern European countries were still posting higher economic growth than their counterparts in Western Europe because they are continuing the changing process, while people are constantly increasing their efficiency. In other words, good news for countries like Poland, Hungary, Bulgaria and Romania.

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Despite the political and economic changes that both Romania and Hungary have faced in recent months, they remain interesting targets for foreign investors who want to extend their operations and have decided to invest in the region. But what are the odds of Romania becoming a more attractive target for foreign investors in the future?

When Finnish group Nokia announced in September last year that it would stop the production of mobile phones at its plant in Jucu as part of a program to increase efficiency and reduce costs, local authorities were gloomy. Specialists warned that Romania couldn’t afford to lose large investors. Nokia alone had invested about EUR 60 million in its Jucu plant in February 2008 when it became operational.

Fortunately 2012 has brought with it two pieces of good news: the Italian household appliance producer DeLonghi will extend its business in Romania by buying the Nokia factory in Cluj, while German group Bosch announced that it would rent 215,000 sqm in the Cluj area where it will
invest about EUR 77 million. The company expects to create over 300 new jobs in the first phase. Meanwhile, Indian carmaker Tata Motors is currently negotiating with local authorities in Cluj its entry on the Romanian market via an investment in the Tetarom 3 industrial park in Jucu.

While this is encouraging news for the business community, Romania is far from being a top target for foreign investments. According to data from the National Bank of Romania (BNR) cited by Romania Trade & Investment (the Romanian Center for Promoting Foreign Trade and Investments), between 2008 and 2010 foreign direct investments fell by nearly 77 percent, from EUR 9.5 billion to EUR 2.2 billion.

In addition, in the first ten months of last year the level of FDI was EUR 1.3 billion. However, according to specialists at AT Kearney, in 2011 Romania remained attractive for global services, ranking 25th among 50 countries worldwide included in the list. In addition, within the region Romania out-performed its traditional competitors such as Hungary, the Czech Republic and Slovakia.

In such conditions, how will Romania convince investors to come here instead of going to Hungary? What are the main advantages that Romania could offer potential investors compared with its neighbor?
“For foreign investors, both Hungary and Romania are emerging markets in the European Union. Hence, they have a high potential for growth and a much higher level of profitability, if the current EU financial and macroeconomic problems are solved,” says Dragos Cabat, partner at efin.ro. But he warns that the two countries’ high dependency on commercial relations with the EU is a real millstone.
“It is hard to believe that those investors interested in EU members will pay more attention to Romania because of the problems that Hungary is facing at the moment. On the contrary, I think that Hungary’s problems will have a ‘regional contagion’ effect and will make investors even more cautious than they were anyway about this region,” says Cabat.

At present Hungary has several disadvantages compared to Romania, which have appeared recently: it has an authoritarian political system that is also unenthusiastic about the EU and takes an aggressive approach towards the IMF and other international financial institutions, which is about to change only under pressure from the EU and because of its financial problems.
“We are in a family relationship with the IMF. We are shareholders at the IMF so this institution is not our commander. We don’t beg for money and we don’t have to be forced. We are a family and we have the right to a preventive support program,” said Gyorgy Matolcsy, the Hungarian minister of economy, recently.

Such talk has done little to soothe Hungary’s relationship with international organizations.
“As a consequence of the Hungarian authorities’ weird behavior, the country’s ratings are at ‘junk’ level and lower than Romania’s (e.n. investment grade). As a competitive advantage on the long term, Romania has a more balanced structure of industrial production facilities and a qualified workforce who speak English well. More recently, the flexibility of working relationships and the lower level of taxes are also to Romania’s advantage,” says Cabat.

Poor local infrastructure…
According to a report by the World Economic Forum, quoted by Mediafax, Romania is ranked 134th out of 139 countries for the quality of its roads. Despite being the ninth largest country in the EU, Romania has only 313 km of motorways, less than three percent of the German motorway network.

Meanwhile, in Hungary for example, the State Motorway Management Co. Ltd., founded in August 2000 by the merger of three companies, is responsible for the operation and maintenance of roughly three quarters of the country’s highway system. This totals more than 700 km of highway, some 200 km of motorway and roads and a 366 km long road junction branch. Romania’s poor infrastructure has the effect of deterring foreign investors, say commentators.

And the problems don’t stop there. “Romania has a high level of bureaucracy, corruption and the legal and judicial system is very complex and inefficient. The state doesn’t support private
companies, for example in collecting debts from debtors,” says Stefan Ponea, CEO & managing partner at Industrial Access.

Mercedes chose to invest in Hungary instead of Romania back in 2008 because of Romania’s lack of infrastructure. As a result, Daimler decided to extend its Rastatt plant with an investment of EUR 600 million and to build an EUR 800 million new plant in Kecskemet, Hungary. The two plants will operate as a production network.

The Kecskemet plant will manufacture two of the four models from the new Mercedes-Benz premium compact vehicle generation and will have an annual production capacity of more than 100,000 units. The plant will ultimately employ more than 2,500 people. The production of customer vehicles is planned to begin early this year.

…but lower VAT and better economic perspectives
The Hungarian authorities recently decided to increase VAT by two percentage points to 27 percent, which means that Hungary has the highest level of VAT in the whole European Union. According to the latest data available on the market, from September 2011, it is followed by Denmark and Sweden (25 percent), Romania (24 percent) and Poland, Portugal, Finland and Greece (23 percent). Cyprus and Luxembourg have the lowest level of VAT (15 percent).

According to Emil Boc, the former prime minister, the Romanian economy posted growth of about 2.5 percent in 2011 after two years of economic decline, one of the highest growth rates in European Union. And the good news doesn’t stop there. Both the European Commission and IMF expect Romania to post economic growth above that of the Euro zone. In addition, the inflation rate is the lowest in the past 20 years while Romania has the smallest public debt-per-capita in the EU. The unemployment rate is two points below the EU average, the EUR-RON exchange rate is stable and the budgetary deficit is under control, with no financing problems.

By contrast, according to Eurostat data released last week and cited by Portfolio.hu, by the end of the third quarter of 2011, Hungary’s debt-to-GDP ratio had inched up to 82.6 percent from 82.4 percent a year earlier. In addition, compared with the second quarter of 2011, fourteen EU member states registered an increase in their debt-to-GDP ratio at the end of the third quarter of 2011, and thirteen a decrease. The highest ratio increases were recorded in Hungary (+4.8 percentage points), Greece (+4.4 pp) and Portugal (+3.6 pp), and the largest decreases in Italy and Malta (both -1.6 pp) and Romania (-1.0 pp).

Also, Hungary intends to sign a preventive financing agreement with the IMF and EU in order to protect its currency and bonds, while it will have to roll about EUR 5 billion of external debt this year, in addition to bonds issued in forints that will reach their maturity. But the EU has already initiated procedures for excessive deficit against Hungary.

The authorities from Budapest have two months to convince Brussels that they will keep the country’s budgetary deficit under 3 percent of GDP in 2012. The IMF expects Hungary to post economic growth of 0.3 percent on a base scenario but the institution warns that if the current crisis in the Euro zone escalates, leading to a contraction of 3.4 percent of the Hungarian economy because of the significant decrease in exports, a deficit of external financing will appear over 2012-2013.

Last but not least, due to the deepening debt crisis and the erosion of confidence in Hungary’s economic policy, the forint has recently fallen to record lows.

anda.sedesi@business-review.ro

ROMANIA
Strengths:
Better macroeconomic indicators (at present and predicted)
Lower level of VAT (24 percent)
Stable currency
Better rating – investment grade
Flexibility in relations with the IMF and other international financial institutions
More balanced structure of industrial production facilities
Flexibility of working relationships
High potential for growth

Weaknesses:
Poor infrastructure
High level of bureaucracy and  corruption
Temporary political difficulties                                                                                                                             Insufficient state support for private companies
Low level of absorption of EU funds
High dependency on commercial relations with EU

HUNGARY
Strengths:
Much better infrastructure
Better economic integration
Proximity to Western Europe
High potential for growth

Weaknesses:

Lower macroeconomic indicators (at present and predicted)

Higher level of VAT (27 percent)
Currency depreciation
Poor rating – junk
Inflexibility in its relations with the IMF and other international financial institutions
Heavy dependency on commercial relations with the EU
Temporary political difficulties