Analysis. Romania making efforts to prove its economic stability

Newsroom 06/11/2017 | 12:42

With an estimated economic growth of 5.3 percent for this year, Romania needs to prove a sustainable macroeconomic stability in order to attract foreign investments. Given the growing M&A market and large companies that will or already have made massive investments in different fields, Romania has to make huge efforts to be an attractive destination in the eyes of large multinational companies.

By Anda Sebesi

At the beginning of October, the giant American carmaker Ford launched the production of its newest model, EcoSport, with an investment of EUR 200 million in its car plant in Craiova, a move that generated about 1,000 additional jobs.

According to John Oldham, the president of Ford Romania, due to this investment, Craiova has become the sole place for the company to produce its new EcoSport that will be sold in the EU market. “Our car plant in Craiova plays a significant role for Ford Europe and I truly believe that Craiova is ideal for manufacturing our EcoSport because we have an excellent plant and excellent people,” stated Oldham at the EcoSport launching, cited by Mediafax.

As Romanian President Klaus Iohannis stated on the same occasion, Craiova has become a significant Romanian industrial center again, because of foreign investments. “Here in Craiova is a good example of an industrial ecosystem created by tens of Romanian companies that have developed around the Ford company. With the launching of the new Ford model, the Romanian car industry will work up a stronger reputation on the European car market,” added Iohannis, cited by Mediafax. According to him, the post crisis annual pace of growth of the local car market was about 15 percent and now Romania is ranked eleventh in Europe by its annual car production. “The Romanian car industry represented about 13 percent of the GDP last year and a quarter of our total exports,” added the Romanian President, cited by the same source.

Along the same line, e-commerce giant Amazon will open its Bucharest offices in a new building developed by Globalworth in Northern Bucharest, according to wall-street.ro. Dimitris Raptis, the deputy CEO and CIO of Globalworth, said that Amazon would be the anchor tenant in the first office building set to be delivered this year in the Globalworth Campus, in the Pipera area. Amazon already has a development center in Iasi and the company has decided to expand in Bucharest in a bid to tap the IT talent pool present in the Romanian capital. In Iasi, Amazon has leased 13,500 sqm in building five of the United Business Center (UBC), the office project developed by Iulian Dascalu. The media reported that the e-commerce behemoth was looking for more than 10,000 sqm office space in Bucharest.

Ford Romania and Amazon are two examples of large multinational companies that have decided to either extend or build their activity on the local business ground. Recently, Ilan Laufer, the minister of the Business Environment stated that some large companies, attracted by Romania’s economic growth and the potential of the domestic market, will relocate their operations here by year-end, adding that the local IT sector will continue to show significant potential. Furthermore, he stated that the 5.8 percent economic growth that Romania registered in the first semester, along with its yet macroeconomic stability, are key factors that determine foreign investors to look for investments in our country.

 

Still an attractive destination for foreign investors

According to the European attractiveness survey, a 2017 barometer conducted by EY, Romania is ranked fourth in Europe among the countries with the highest number of new jobs created because of direct foreign investments in 2016. Last year, Romania attracted 132 FDI projects, 32 percent higher compared with the previous year, creating over 17,500 new jobs. This ranks Romania ahead of the Czech Republic and Hungary in the Central and Eastern Europe region and twelfth in the general European ranking. “In 2016, the geopolitical preoccupations have been a priority for boards of directors, but investments continued to be made in the largest unique market worldwide, where the GDP of the Euro Zone exceeded that of the United States for the first time since the financial crisis in 2008. The slow increase of many emerging markets in 2016 seems to have contributed to the European attractiveness, while global investors see the European workforce as a very important asset,” says Bogdan Ion, country-managing partner at EY Romania.

According to the latest report on foreign direct investment in Romania in 2016, issued by the National Bank of Romania (BNR), the FDI net flow stood at EUR 4.5 billion last year, while the final FDI stock amounted to EUR 70.1 billion at the end of 2016.

By economic activity, BNR data shows that FDI stock was channeled primarily to manufacturing (32.0 percent of total FDI), out of which the largest recipients were transport equipment (6.7 percent of total FDI stock), oil processing, chemical, rubber and plastic products (6.4 percent), metallurgy (4.1 percent), food, beverages and tobacco (3.4 percent), computer manufacturing, electronic, optical and electrical products (2.5 percent). Another industrial activity, electricity, gas and water supply, accounted for 9.6 percent of total FDI stock. Apart from industry, other activities that also attracted significant FDI were construction and real estate transactions (14.0 percent of FDI stock), trade (12.8 percent), financial intermediation and insurance (12.6 percent), and professional, scientific, technical and administrative activities and support services (5.6 percent).

The same report shows that, from the geographical perspective, FDI went mainly to the Bucharest-Ilfov region (59.9 percent). Other development regions which attracted significant FDI inflows were the Central region (9.1 percent), the Western (8.0 percent), the South-Muntenia region (6.9 percent), and the North-West one (5.9 percent).

 

The local M&A market to grow

According to a recent analysis conducted by Deloitte Romania, the local M&A market reached EUR 898 million in Q3 of 2017. The same research says that 28 acquisitions have been announced in the same period or 20 percent more than in the similar period of last year while the value of the transactions tripled. “The M&A market has already reached EUR 2 billion in the first nine months of this year. However, more impressive is that this total is not the result of the closing of mega transactions but due to six transactions with values between EUR 100 and 500 million. Usually, Q4 is the most important one in a year and, considering the transactions that are currently in negotiations, we expect an addition EUR 1 billion to the current total,” says Ioana Filipescu, partner, mergers and acquisitions consultancy at Deloitte Romania. During the analyzed period, the average value of a transaction was EUR 56 million, showing an increasing trend of the value of M&A transactions.

A not too promising economic context

A recent quarterly report conducted by UniCredit Bank called “A macroeconomic analysis and strategy,” the economic growth of over five percent anticipated for 2017 hides some bigger fiscal imbalances. Ad hoc measures along with increasing taxes and diminished public investments could maintain the budgetary deficit under 3 percent of the GDP this year. However, this is not also valid for 2018, the UniCredit Bank specialists warn in their report.

In addition, a more accelerated salary increase compared with that of productivity shows that the Romanian national currency (RON) should depreciate in the next years, they say. “The fiscal policy represents the biggest risk for the local macroeconomic stability now. The government continues to implement populist measures despite the limited resources. We anticipate an increase of just 1.2 percent of the income from taxes this year despite a nominal increase of the GDP of 9.9 percent. In addition, salaries from the public sector and social expenses could increase by 16.6 percent in 2017, compared with 2016,” says the same analysis.

Going along the same line, because of the significant budgetary adjustments, the deficit for 2017 could be around or under 3 percent of the GDP, according to the European methodology, especially if part of the investments made this year will be categorized as expenses for defense. “Despite this, the government risks ending 2018 with a budgetary deficit of about 3.7 percent of the GDP, because the budgetary incomes cannot finance the tax recovery planned to become operative next year,” says the same analysis.

As the UniCredit Bank report shows, the economic growth could slow from 5.3 percent this year to 3.6 percent in 2018, because the consumption and stocks will become moderate. “Employees from the public sector will see an increase of their gross salary by about 25 to 70 percent in 2018, with education and healthcare sectors benefiting by the highest planned increases,” conclude the UniCredit Bank analysts.

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