As the EU’s fastest growing economy, Romania should be seeing a wave of new investment. Instead, foreign investors say they are putting new projects on hold due to the lack of policy predictability.
The latest to add his voice to the growing tide of criticism was President Klaus Iohannis, who urged the government to drop its plans for fiscal reform and an overhaul of the judiciary in a strongly worded speech on November 2. The president, who has previously clashed with the centre-left government, warned officials not to “throw Romania into an economic adventure with a sad ending”, and cautioned that Bucharest risks losing investors if it continues on the current course.
This had already been highlighted in a recent survey by the Foreign Investors Council (FIC), which showed that confidence of foreign investors in the Romanian business environment had slumped. Of the FIC members surveyed, 75% said that the business environment in Romania has worsened recently and that current developments have lowered their trust, and up to 90% of respondents said the constantly changing legislation is affecting their business planning compared with just 25% who said this in 2015.
Their views reflect a turbulent year in Romanian politics. The country is currently on its third prime minister this year, with each change of government heralding an intense period of uncertainty. This was especially the case when Mihai Tudose came to power in June, making a series of policy announcements that were just as quickly changed or abandoned. Beyond that, the uneasy relationship between the leader of the ruling Social Democratic Party (PSD) Liviu Dragnea on the one hand and Tudose and his predecessor Sorin Grindeanu on the other has led to further confusion.
These are not the only problems. “Continued lack of infrastructure, increased shortage of adequate workforce, regulatory and fiscal uncertainty and a sentiment that the business environment is deteriorating will lead to less investments, local or foreign, and this in turn will lower growth and take the economy below its potential,” claimed the FIC study published in October.
Representatives of other international investors’ organisations such as Amcham Romania and the Romanian-German Chamber of Commerce and Industry (AHK) also deplored the situation in the country at the Business Review Foreign Investors’ Summit in Bucharest on October 31-November 2, with a special emphasis on policy predictability.
AHK president Dragos Anastasiu told the conference that “on paper we are doing well, but at the same time a survey of our members shows that feeling for business in Romania is going down.”
Dutch ambassador to Bucharest Stella Ronner-Grubačić, whose country accounts for the largest share of investment into Romania, had a similar story to tell, saying that, “in many conversations with Dutch businesses we hear concerns about changes to legislation, the business climate, lack of investment in infrastructure and education.”
Meanwhile, a new report from AmCham Romania expresses concern over the impact of the recently announced fiscal policy measures, both in terms of increased costs for taxpayers and budgetary sustainability.“[T]his package of measures is proposed shortly after many fiscal changes were introduced, also adopted hastily, thus creating instability and confusion in the business environment with regard to the impact of such measures as well as with regard to their implementation procedure,” AmCham said.
For employees, the changes are also a source of concern, as they fear a fall in take-home pay as social security contributions are shifted from the employer to the employee. Romanian trade union confederation CNSLR Fratia announced on November 2 it has decided to start procedures to launch general strike after failing to persuade the government to drop the plans. At the same time controversial judicial reforms that, if adopted, will increase political control over the judiciary and make it easier for corrupt officials to avoid prosecution are likely to lead to more protests following the mass demonstrations earlier this year.
“Hard to invest”
The fear is that all these problems could lead investors to exit or at best postpone committing more funds to Romania. AHK’s research shows that, “almost all new projects and expansions by German investors are on hold because of two problems: predictability and workforce. When you put those two problems together you see it’s hard to invest in such an environment,” Anastasiu stressed.
Jorg Menzer, partner and head of law firm Noerr’s CEE offices put it even more bluntly, saying that “time is of the essence” if Romania is to capitalise on its current strong growth to secure investment for the longer term. “If investors don’t get what they want immediately they will go elsewhere,” he said.
The government sought to respond to the criticism from the business community. Speaking on behalf of the government, prime ministerial adviser Ramona Ivana Lohan stressed that while Romania has achieved strong growth, “we don’t want to fall into the pro-cyclical trap” and that with Romania behind its true potential, “accelerating investments is our highest priority.” She also talked of the need for more investment in infrastructure, and to take urgent action to tackle the brain drain.
Referring to the recent policy changes, Lohan admitted that, “we know the measures had a negative reaction from business, but we hope that with discussion [we] can overcome these so you can do business in a friendly and honest environment.”
Her speech met with a mixture of relief and scepticism from business leaders. “That was one of the best government speeches I have heard,” commented Anastasiu, saying the list of all the problems businesses are facing “means they got it”. However, he questioned whether this understanding will translate to support for business in practice: “We all know what we have to do but our views on the way to get there are completely different … we feel there is no trust in us.”
The other major issue that is just coming to the fore is the workforce. For a number of years it has been precisely the availability of educated, skilled workers coupled with low costs that has drawn investors in sectors from automotive components manufacturing to IT to set up shop in Romania. Now, however, wages are rising and Romania is following the countries of the CEE region that have already seen a dramatic fall in unemployment and related squeeze of their labour markets.
IT and outsourcing firms in particular have been forced to hike wages and become creative in offering additional benefits from in office gyms and saunas to subsidised housing for their workers in order to attract and keep good people. As it becomes harder to find workers in Bucharest and Romania’s second city Cluj, tech firms are looking further afield to second-tier university towns like Iasi, Brasov and Craiova.
Bridging the innovation gap
Ronner-Grubačić referred to the importance of innovation for economic development and stressed that “the knowledge and tech gap in some sectors of the Romanian economy needs to be bridged, the problem with skilled labour needs to be fixed. If not, investors will move elsewhere.”
“If Romania is going to become an innovation driven economy, the only constraint it has is human capital,” added Dragos Pislaru, Romania’s former labour minister, now a partner at think tank Civitta Romania. Pislaru singled out issues such as Romania being the last in Europe in terms of lifelong learning, with just 3.3% of the workforce currently receiving training as one of the limiting factors.
Romania still has a raft of positive attributes, including the country’s strong economic growth rate. The government’s forecasting body, the CNP, has just lifted its forecast for this year to 6.1%. Admittedly, this is mainly consumption driven growth on the back of fiscal easing and wage increases, as pointed out by the European Commission in its Spring Forecast earlier this year, while “investment, by contrast, contracted as public investment fell”.
Other positives noted by the head of the European Bank for Reconstruction and Development (EBRD) office in Romania, Matteo Patrone, include the progress in the fight against corruption, the emergence of high value added sectors, and Romania’s demonstrated resilience to recent external shocks such as the Greek debt crisis and the war in neighbouring Ukraine.
Add this to the frequently touted benefits of Southeast Europe’s largest market – at over 17mn, Romania’s population is more than twice as large as those of the region’s next largest countries Bulgaria and Serbia – and natural resources from oil and gas to abundant farmland, and in many ways there is a compelling investment case if the issues of policy predictability and labour availability can be overcome.
Romania also shines in comparison to its northern neighbours when it comes to its relationship with the EU. Unlike most of the Visegrad Four countries whose governments are increasingly in conflict with Brussels, Romania is firmly committed to deeper EU integration, which Bucharest hopes will culminate in entry to the eurozone.
“We are in a region that is not among the best in Europe,” Oana Popescu, director of the GlobalFocus Center think tank, put it, citing the way CEE member states have started to distance themselves from Brussels and pursue their own interests. “Romania by comparison seems like the angel in this region, an advantage we haven’t had before. Germany and other member states have not previously shown a lot of interest [in Romania] but they are interested now.”
Still, for Romania to attract increased investment, Bucharest must make a concerted effort to bring about political stability and policy predictability to prevent international investors taking their money elsewhere.