Romania: recession free?

With estimated economic growth of about 2 percent this year, Romania has emerged from the recession but still has a long way to go to get through the current economic crisis. In order to help ensure sustainable growth, the government must develop a clearer and more predictable taxation system, say experts.

Anda Sebesi

Last month the National Institute of Statistics announced that Romania had emerged from recession, after the country posted a 0.6 increase percent in its GDP in the first quarter of 2011 on the preceding quarter. Prior to that, in the last quarter of 2010 the local economy inched up 0.1 percent from the third quarter of last year. This means that Romania has registered growth in two consecutive quarters which technically constitutes coming out of recession, according to commonly accepted economic principles.

It’s encouraging news for everyone, but while the country is now back in growth territory after two and a half years of recession, the economic problems are far from entirely solved. “The country is out recession because of the high demand for primary industrial products from Germany, France and other EU members. Many manufacturers from the EU focused on cutting costs as a result of the current economic crisis and the fierce competition from China and other emerging markets. Romania managed to get out of recession mainly because of this increased demand from more advanced EU countries,” says Dragos Cabat, managing partner at efin.ro. He adds that Romania is among the last countries to emerge from recession because of the restrictive policies of the government. “In addition, local consumption is based on credit and the remittances sent home by Romanians who work abroad,” he notes.

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Mark Gibbins, partner, head of taxation services at KPMG, strikes a cautious note, warning that just as a country can enter a technical recession by registering negative growth in two successive quarters, when in fact other economic indicators give a different picture, so too can an economy enter a technical recovery. “It is still too early to say whether Romania has truly emerged from recession, and opinion is divided on the subject. Some economists think that Romania still has some difficult years ahead and there are certainly challenges, such as growing defaults on mortgage and consumer loans. The budget deficit is still high and the government must maintain discipline to fulfill the conditions of its agreement with the IMF,” advises Gibbins.

Emerging from recession doesn’t mean that Romania has passed the current downturn. Cabat says that usually there is a gap of about six to nine months between exiting the recession and the moment when standards of living start to improve. “That’s why we can estimate that economic growth will be felt by Romanians at the end of 2011,” says the analyst. He adds that Romania will register economic growth of about 2 percent this year, with sustainable growth for the country on the medium term – the next three to five years – of 3.5-4 percent.”A more accelerated economic growth could bring about a macroeconomic imbalance, which has already affected us in the past,” cautions Cabat.

Gibbins believes that to help ensure sustainable growth, the government should develop a clearer and more predictable taxation regime. “The current system has become very complex and many investors spend a lot of time on tax administration, which potentially diverts resources from commercially productive activity. The government should try to avoid making changes to the tax system at short notice, which can be destabilizing for business. In addition, the tax authorities should speed up the process of granting refunds when taxpayers are eligible for them,” urges Gibbins.

Asked what Romania should do to ensure sustainable long-term economic growth, the KPMG representative says that the government should considerably improve the rate of absorption of EU funds, particularly for infrastructure projects. “Large sums are available in EU funding which can be used for infrastructure projects, presenting a historic opportunity for modernization. This gives the chance not only for Romania to become more competitive as an investment destination in the long term, but also to aid short-term recovery because an EU-funded infrastructure development program would boost the economy and create jobs. It would particularly benefit the construction industry, which has been especially hard-hit by the recession,” says Gibbins. In his opinion Romania presents many opportunities for investors, and he believes that this is a good time for businesses that may have been cautious about emerging markets since the start of the recession to look at Romania again. “While we are unlikely to see a return to the very high short-term returns which many investors made in 2005-2008, there are many sectors with potential for steady, long-term growth, such as renewable energy, healthcare, pharmaceuticals and tourism,” says the KPMG partner. In addition, Cabat predicts that exports and services will continue to be the main drivers determining Romania’s economic growth in the future. “Consumption, construction and agriculture will start their engines later and move at a lower speed,” he concludes.