CONFERENCE CALL: Romania’s investment problem

By bne IntelliNews April 7, 2015

Clare Nuttall in Bucharest -


With GDP growth slightly above the CEE regional average, the situation in Romania looks good on paper. But low investment – both public and private – threatens to hold back the country's long-term growth and prevent convergence with the EU.

In 2014, public sector investment fell in just five European countries, according to UniCredit Group. Three – Croatia, Serbia and Ukraine – were in recession, while the fourth, Russia, experienced a severe slowdown amid the conflict with Ukraine and Western sanctions. The fifth was Romania, where despite positive growth, public investment dropped to its lowest level since 2010 – a year when the country made the largest fiscal adjustment in Europe, UniCredit CEE economist Dan Bucsa told the conference "Emerging Funding for the Real Economy" in Bucharest on April 2, organised by The Associates.

Private sector investment was equally lacklustre. According to a February 13 statement from the Romanian central bank, net foreign direct investment (FDI) dropped from €2.9bn in 2013 to an estimated €2.4bn in 2014. FDI is expected to remain below 2% in 2015 and 2016.

Romania’s location neighbouring Ukraine is not seen as a cause of the dip in investment. “We have not see any direct consequences of the Ukraine crisis on the Romanian markets, nor concerns among investors,” Bogdan Olteanu, deputy governor of the National Bank of Romania, told the conference. This is in line with the general picture across CEE, where most countries have benefitted from lower trade deficits with Russia, as imports dropped more than exports.

Stefan Nanu, general director for treasury and public debt at the Romanian Ministry of Public Finance, acknowledged that in 2014 public investments were “less than expected”, but added that this year there is a “generous allocation from the budget” and the government has made a “big commitment to improve”.

“The money is there and there is a large pipeline of projects outstanding. The focus should be on projects that will benefit from EU funds, and benefit the economy,” Nanu told delegates.

Soaking up the money

European Commission data shows wide variations in the absorption rates for cohesion funds in the 2007-2013 budget. Lithuania tops the list, having absorbed 93.7% of funds available, with Estonia, Poland, Slovenia and Latvia also above the EU average of 80%. Meanwhile, Romania was in second-to-last place, above only Croatia. Inflows of funds to Romania have also been more irregular than in other CEE countries, with large chunks of funds typically arriving in December rather than evenly throughout the year.

The Romanian government has stressed the importance of boosting the absorption rate this year so as not to miss out on billions of euros worth of funding available under the 2007-2013 budget, which will expire at the end of the year.

Romania’s absorption rate for the 2007-2013 EU budget hit 53.12% at the end of March 2015, according to a statement published on the ministry for European funds' website on April 6. Bucharest had set the ambitious target of raising the absorption rate to 80% in 2015, which would require submitting an average of €500mn of invoices a month. However, Bucharest submitted invoices for just €12mn of funds in January, €57mn in February, and €100mn in March, the ministry said. Newly appointed Minister of European Funds Marius Nica has also indicated that the ministry's target is between 60% and 80%.

Low public spending on infrastructure is partly a consequence of the government’s focus on keeping the budget deficit under control, at the expense of investment projects that could have long-term benefits for the economy. This pressure increased in 2014 as the presidential elections approached, and the government initiated cuts to social security contributions. The new fiscal code, which is expected to be discussed in parliament in April, also contains numerous tax cuts, which is likely to put pressure on the budget, despite forecasts of longer-term benefits. Again, this is seen as a move to boost support for the government ahead of the 2016 parliament elections.

However, as well as keeping a lid on growth, the lack of public sector investment has also been a deterrent to private investment. Low investment into roads and railways in particular puts Romanian manufacturers at a clear disadvantage to those in countries such as Poland or Hungary, which have much better transport links connecting them to Germany and other major west European markets.

PwC’s CEO Survey 2014 found that transport infrastructure is still one of the country’s “main economic vulnerabilities”. 88% of CEOs surveyed said that the government should make improving infrastructure a priority – the highest percentage in any of the countries in the worldwide survey.

In the private sector, UniCredit’s Bucsa cited a survey showing that companies in Romania reported the lowest strain on capacity, indicating that most did not intend to invest, most likely either as a result of low demand or the legacy of the recent crisis. While 80% of companies in the Czech Republic said they had capacity constraints, that figure was just 50% in Romania. “Possibly Romanian companies are pessimistic about future growth and demand,” Bucsa said.

Private consumption, which revived in 2014 on the back of rising real disposable income, replaced exports as the main growth driver in Romania. Domestic demand became the main contributor to GDP growth – estimated at 2.9% in 2014 – according to a March 27 report from the International Monetary Fund (IMF).

Preliminary IMF figures put Romania’s 2014 growth at 2.9% moderating to an expected 2.7% this year. This is around the CEE average, with most countries growing by between 2% and 3% – though Poland is expected to expand by over 3%. However, Bucsa points out that while Romania’s GDP growth remains around the CEE average, this is too slow to enable convergence with the EU.

The March 27 IMF report also said that “income convergence with the EU has been slow”. “Raising growth prospects over the longer term requires continuity of sustainable macroeconomic policies, underpinned by stronger fiscal and regulatory institutions, and a more stable and predictable business environment which is crucial for investor confidence,” the IMF said.


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