CONFERENCE CALL: Romania no longer the EU’s poor relation

CONFERENCE CALL: Romania no longer the EU’s poor relation
The “Emerging Funding for the Real Economy” conference in Bucharest.
By Clare Nuttall in Bucharest April 20, 2016

In an EU that is riven by conflict over the migrant crisis and struggling to revive growth, Romania has emerged as an unlikely success story.

Along with neighbouring Bulgaria, Romania used to be a kind of problem child of the EU, a poor country on the fringes of Europe, struggling with corruption, whose citizens responded to its entry to the bloc by fleeing to richer member states.

However, GDP growth this year is expected to be the second fastest in the 28-member bloc, second only to Ireland according to the European Commission’s latest forecast, and a steady stream of international investors are setting up or expanding operations in Romania. In recent weeks automakers Ford and Renault both announced expansion plans, as did Federal-Mogul Motorparts and Elektrobit, which is owned by German auto-components manufacturer Continental.

Romania’s current strong economic performance comes against a backdrop of slow economic growth and internal divisions within the EU, speakers at the “Emerging Funding for the Real Economy” conference in Bucharest pointed out on April 19.

Richer nations such as Spain and Italy that took in Romanian workers are themselves struggling economically, while Romania’s economy is booming to the extent that one of the main problems cited by investors is the shortage of skilled workers in an increasingly overheated labour market.

And while Europe tears itself apart over the migrant crisis, Romania is one of the few European nations exempt from this raging dispute. Unlike almost all of its neighbours, Romania is not on the migrant transit route, and unlike fellow EU members, in particular Germany and the UK, there is no interest from refugees or migrants in moving there.

That said, Romania still suffers from external perceptions of instability and political risk because of its geographical location – in the corner of Europe closest to the Middle East, next to Ukraine, and facing an increasingly unpredictable Russia across the Black Sea. However, George Friedman, founder and chairman of forecasting service Geopolitical Futures, who gave the keynote speech at the event, forecast this could create a window of opportunity for investors.

Romania is set to grow more than twice as fast as the EU’s main industrial powerhouse Germany this year. In the longer term, Friedman forecasts that German exports will no longer be competitive, resulting in a steady decline in GDP. Germany’s vast industrial corporations build up from the 1950s “can’t sustain themselves without export markets,” he warned, adding that, “this is the opportunity for Romania. Romania does not have this problem”.

In fact, this is an opportunity for countries across the Central and Eastern European region, where Friedman extols the “entrepreneurial capabilities of Eastern Europe, with their enormously educated populations and big domestic markets.” While he claims some countries (such as Poland) are “too bureaucratised and controlled” and others such as Hungary are too small, “Romania is large enough to have an internal market, but it also has the Balkans, Ukraine, Africa, the eastern Mediterranean... all places where it can grow into.”

More than an appendix

As an exporter, Romania has already had substantial success, Manuel Costescu, state secretary of the newly active Romanian government agency Invest Romania. While Costescu acknowledges that many investors came to the country because of its cheap labour, he says the situation has developed since then. “Romania has moved away from being an economy based on cheap labour, is now in a phase where it is a Romania of quality and a Romania of talent,” he told delegates. “Investors want to be here because Romania has turned from an appendix to Europe producing something cheap to a country where high quality of labour is valued and people are moving into high value areas. This happened in an organic way; the government didn’t do anything; the market is responding to the private sector.”

This is not to say Romania is without problems. Despite the recent boom in sectors such as IT and manufacturing, Friedman believes that the country still relies too much on natural resources and energy production. “The grave weakness of Romania is too much oil, too much coal and too much natural gas, because of the natural tendency of Romanians to focus on exporting and using these things... In some ways energy and minerals supported Romania, and in some ways they trapped it,” he says. Now, however, “the global appetite for primary commodities has not temporarily contracted, it has fundamentally shifted.”

Instead, foreign investors and Romanian entrepreneurs will be responsible for the country’s future growth, which panellists including representatives of the Romanian central bank and commercial banks said would require better access to finance for small and medium-sized businesses. 

While Friedman called for a “banking system that serves the needs of small companies”, National Bank of Romania Deputy Governor Bogdan Olteanu said he strongly believed the banking sector was “unbalanced”, with banks focusing too heavily on larger corporate clients. Enache Jiru, state secretary of the finance ministry, agreed that funding sources were “not diversified” enough in Romania.

Moreover, Romania’s recovery is very much consumption driven – spurred on by fiscal stimulus in the form of VAT cuts and hikes in public sector wages – and it is not clear what the long-term benefits will be for the local economy. While retail is booming, there are fewer signs of investment into domestic production; the stimulus has resulted instead in a spike in imports.

“In Romania... we see much more household consumption than investments, which in the short term is contributing to growth, but in the long term it isn’t necessarily the best strategy,” commented Juraj Kotian, head of CEE macro and fixed income research at Erste Group Bank, adding that, the fiscal loosening in Romania was “definitely excessive”.

Ionut Dumitru, chief economist at Raiffeisen Bank Romania and head of the independent Fiscal Council, warned that, “the main issue is that the fiscal stimulus is quite unbalanced, with a focus on stimulating consumption and almost no focus on stimulating domestic supply.” He called on the government to “strongly resist political pressure to introduce populist measures” as the autumn general election approaches, and notes that MPs have “plenty ideas about how to increase the budget deficit”.