Analysis. What could Brexit and Trump mean for Romania's economic outlook

In order to ensure ongoing sustainable development, Romania needs to adapt its approach and capitalize on its main advantages in a challenging and difficult climate. International economic threats may lead to a local slippage that can be counterbalanced by a coherent and realistic development strategy.

Anda Sebesi

Given the current political uncertainty, it is hard to believe that Romania, one of the emerging players on the global market, could be isolated from the potential major changes that look set to shape the international scene.

According to pundits, today’s complex economic and political context could lead investments and projects to be either postponed or have only a marginal impact on the Romanian economy, at least this year. Regardless of when the UK activates Article 50, starting the procedure to exit the European Union, there will be a “window” of two years of negotiations until the country’s actual departure.

“The real impact for Romania will come from the way the European Union could change in order to face the challenges and crisis generated by Brexit,” says Codrut Pascu, senior partner and managing director at Roland Berger. As for Donald Trump’s tenure, pundits say that his protectionist policies could lead to a commercial war; however, even this is unlikely, as the Trump administration’s limited political experience could delay radical measures.

One of the top three challenges for the EU economy is the potential political shifts in the key countries of Germany, France, the Netherlands and Italy, where important votes have recently taken place or where elections will come in 2017. Those shifts will also influence the EU economy.

In addition, the refugee crisis continues, with adequate solutions not yet in place, potentially creating further political problems. Another challenge will certainly be the European Central Bank’s monetary policy. Quantitative easing may have reached its limits and we have already seen a first move away from it by the US. Markets would definitely suffer after a similar decision by the ECB.

The EU, one of the institutions that will play a key role in Romania’s development in the future, will need to drastically change in the coming years. From an economic perspective, Romania is strongly anchored in the European sphere, as the majority of its foreign investors and commercial partners come from the region.

In addition, it is likely that a potential reconfiguration of the commercial relations between the US, Europe and Asia would have a negative impact on the local economy.

“All we can do is ensure that, at least internally, we take all the necessary measures to put the local economy on a solid basis in order to keep it competitive in a more and more difficult international context. Meanwhile, Romania can capitalize on advantages which we shouldn’t neglect, such as the high level of adaptation of the local economy, an increasing entrepreneurial spirit and the high skill level of Romanians with international expertise,” says Pascu.

In his opinion, the real progress that Romania has made in the past few years has placed it in a position to better face current challenges. “The local economy is stable – with the highest growth rate in the EU – public debt is at a low level (less than half of the EU average), the country rating has improved and Romania has jumped in international rankings (it was ranked 36th in the last Doing Business report compared with 73rd in 2014),” adds Pascu.

However, despite these major steps towards stable development, it may not be enough for Romania to ensure long-term sustainable growth. Bureaucracy represents a significant brake on investments, the transportation infrastructure is still poor, the education system does not meet the demands of the private sector and the public sector is still oversized.

Based on the structure of industries in Romania, the current international challenges will affect the country, since it is still highly dependent on the main European economies to perform well, pundits say. “The biggest threat may be the end of the quantitative easing cycle, since this has a direct impact on the markets in which most of the main Romanian investors operate.

“The impact for Romania could be both a reduction in investments and a fall in production capacity based on reduced demand from abroad. The latter may not happen in 2017, but could still be a danger further into the future,” says Rene Schob, tax partner at KPMG, and head of the German Desk. In his opinion, in order to mitigate these effects, Romania should focus more on the development of the domestic market by closing the infrastructure gap with other countries, and facilitating key local industry growth stimuli by focusing on domestic demand and consumption.

Romania can still flourish

Schob of KPMG says that Romania still has huge potential in various sectors and names agriculture and the related production of semi-finished or finished products, where efficiency and quality improvements would help a lot, among them. “Also, in the tourism sector, there is big, still dormant, potential. Furthermore, innovative approaches in healthcare and energy could fuel both growth and wellbeing for Romanians,” adds Schob.

Pascu of Roland Berger shares this opinion, noting that Romania has substantial capacity to adapt to different economic situations. “This could be a significant opportunity in times of profound economic reshaping, but only if we manage to translate this advantage into valid economic models that can contribute to an increase in competitiveness. We now have the chance to find increased support and flexibility from the EU in the current context,” he says.

However, Pascu warns that it is important for Romania to develop its capacity internally in order to create comprehensive economic programs and develop coherent investment programs that address critical development needs, like infrastructure, education and the healthcare system. “In addition, we have the advantage of maintaining interest rates at a low level, which could contribute to the financing of investment projects if they prove they are able to create added value.”

He adds that institutional investors, who are interested in attractive yields, are refocusing some of their activities towards emerging markets. “Romania has the opportunity to attract funds for new development programs to which some of the Romanians who have built their careers or undertaken studies in Europe or North America in recent years can contribute. In the new context generated by the changes of attitude at a global level and the increased opportunities for development, coming back to Romania becomes a more attractive idea. In addition, we’re speaking about well-trained professionals with a stronger entrepreneurial spirit. They can definitely bring an added value to our economy if they are used to their real value,” says Pascu.

As for the recent political changes brought about by last December’s elections in Romania, Pascu says that there is the risk of a fiscal slippage because of the combination of cutting taxes and increasing spending. “There is also uncertainty in the business environment generated by the lack of clarity and messages sent in the election campaign, mainly towards foreign investors. So the new government needs to clarify their economic priorities. Until then, the uncertainty runs the risk of translating into fewer investments,” concludes Pascu.

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