Romania on path of reform and fiscal prudence, Basescu tells conference

Romania will be able to weather the financial storm and meet its growth targets, President Traian Basescu has confidently declared. The former naval officer compared Romania to a ship that has to respect its contract and get to its destination despite the conditions. This was among the pronouncements made at a conference organized last week by The Economist Group on Romania’s economic potential.

Basescu highlighted some of the reform measures that the coalition government has taken to improve the public finances. The number of public sector workers will decrease from 1.4 million to 1.1 million by the end of 2012. The jobs cuts have been made swiftly, and 180,000 state jobs have been slashed in the last 10 months. Parliament recently passed a new welfare law to reduce the number of programs from 54 to just 9. At present, the total cost of these programs exceeds RON 19 billion, and Basescu said that welfare policy had been used as an electoral tool over the last five years. The president also spoke about the new education law which is in accordance with Europe 2020 targets on education. Romania is trying to reduce school abandonment by 10 percent and increase the proportion of university graduates to at least 40 percent.

The new labor code that was adopted earlier this year also covers around 1 million working contracts in the legal area, and new justice codes were adopted back in 2010. A new healthcare law that will enter a period of public consultation this weekend will reform the current restrictive healthcare system, and allow private insurers to offer services complementary to the public ones.

Getting the fiscal house back in order
Romania will achieve economic growth of 1.5 percent in 2012, and the budget deficit should reach 1.9 percent in cash terms, predicted the president, adding that the bulk of growth will come from increasing the absorption of structural funds from EUR 1.5 billion this year to EUR 6 billion, as the legal mechanism has been improved. This should mean less reliance on FDI. Basescu added that Romania will not create deficits to stimulate growth, but that certain adjustments may occur after the first semester of 2012, allowing a deficit of 3 percent in ESA terms. For 2013, the country should target a 0 percent deficit. On this topic Mark Mobius, the executive president of Franklin Templeton Emerging Markets Group, said that it would be more difficult for Romania to find money on foreign markets, but state-owned enterprises (SOEs) can represent a source of financing for the government.  Mobius added that the “legal system should be fair, allowing Romanians to take the state to court and win.”

Romania is currently pursuing a restructuring and privatization plan for SOEs, such as CFR Marfa (the national rail freight operator). The country will also put up for sale minority stakes in energy firms Romgaz, Transgaz and Hidroelectrica.

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Mixed energy balance
Romania is not a net importer of energy, according to Basescu, who told participants, “We are producing 100 percent of the electricity for internal demand, 75 percent of natural gas and a similar value for oil,” relieving the country’s dependence on imports. However, the energy market should be liberalized, something that has been partially achieved, as Mariana Gheorghe, CEO of Petrom, put it: “We have liberalization in the oil market, a partial liberalized electricity market and a regulated natural gas market.”  In the view of George Cristodorescu, senior executive director at E.ON Romania, a transporter and distributor of natural gas and power, a liberalized gas market would increase energy-efficient consumption and deregulate the current system, under which all household consumers are considered vulnerable.

Louis Borgo, senior banker, power and energy utilities, at EBRD, believes that Romania has been able to provide stability and predictability for the legislation supporting the green certificates scheme, but the Petrom CEO warned that production from green installments can’t be fully supported by the national grid, which needs EUR 500 million of upgrades, although no funding is available at the moment.

Romanian branches of foreign banks under the radar
Basescu hopes the recent announcement by the Austrian Central Bank, on a possible capital flow reduction for branches in CEE, including Romania, was either an error or a misunderstanding of the possible effects. “If you are preparing to leave the Romanian economy underfinanced during the current crisis, we will take it as lack of fair play in your relations with Romania,” Basescu said. He boldly reminded the country’s “European friends“ that the privatization of the banking system was a precondition for EU accession, and that huge profits were made by banking institutions in Romania, during the last decade.

The president also warned that Romania would not pay for the greed of banking systems, the imprudence and the lending bonanza. “European capitalization mechanisms have been created that should prevent banks from strangling the Romanian economy through the reduction of capital flows, necessary both for the state budget and the private sector,” added Basescu.
Cristian Popa, vice-governor of the Romanian National Bank (BNR), swiftly responded that the bank has common goals with regulatory authorities across Europe and mother banks, and a possible massive decrease in the sums that mother banks give their local subsidiaries could peg back economic growth and impact the balance sheets of local banks with foreign capital. “We are not talking about capital, but liquidity, and we are not talking about current financing stock but additions to it, where a balance should be reached in the loans to deposit ratio,” he said.

Dominic Bruynseels, CEO of BCR, commented that the capitalization of banks in Romania is above the EU average. Austrian Erste Group, which has a majority stake in BCR, currently has a EUR 7.5 billion exposure in Romania. Bruynseels added that large loans of over EUR 10 million are under pressure, but lending to SMEs will remain unchanged. Trends in lending will focus on local currency and the retail segment will pick up once confidence in the labor market improves. The BCR CEO added that the foreigners who had previously invested in Romania are now doing so again, concluding, “Romania is a good place to make money.”

Integrated agriculture strategy needed
In the past year agriculture has proved to be a hot topic in Romania, but the lack of a broader and more integrated strategy for this sector continues to prevent Romania from tapping more into its oft mentioned agricultural potential, said Robert Arsene, GM of local agribusiness company Agricover at the event. He argued that even if Romania managed to double its grain production and become a significant exporter in the Black Sea area it would still have a hard time competing with other regional players such as Russia and Ukraine.

Speaking at the same seminar, Martin Schuldt, country manager of Cargill Romania, added to the list of issues that need to be addressed the lack of predictability and the difficulty in consolidating fragmented land plots.