FDI stagnates in Romania

FDI stagnates in Romania
By bne IntelliNews February 15, 2018

The net inflows of foreign direct investments by non-residents in Romania increased marginally by 1.5% y/y to €4.59bn in 2017, but the FDI to GDP ratio narrowed to 2.5% in the year from 2.7% in 2016, according to bne IntelliNews calculations based on central bank data.

The lack of regulatory predictability (fiscal stability) is likely to keep the FDI volumes from rising in future. 

There is more to discourage investors than the repeated changes in the taxation regime. Pegging the benchmark natural gas price to the quotations at Austria's Baumgarden hub, for instance, prompted protests from investors in the gas sector. Delays in large transport infrastructure projects are repeatedly cited by investors operating in Romania or contemplating entry to the market. 

On the other hand, FDI companies needing to substitute workforce (increasingly expensive) with technology support expectations of more inflows in the coming years.

From a broader perspective, FDI to Romania dropped from 5%-6% of GDP in 2007-2008 (and 8.5% of GDP in 2006) to 2.8% of GDP in 2009 and under 2% of GDP in 2010-2015 to recover in 2016-2017.

While the FDI inflows stagnated in absolute terms and contracted when compared to GDP, the Current Account (CA) gap widened from 2.1% of GDP in 2016 to 3.5% of GDP in 2017. Consequently, the CA coverage by FDI dropped significantly under 100% (to 71% from 129% in 2016).

An increasing part of the FDI flows to Romania were intra-group loans contracted by local non-bank FDI companies from parent groups: €769mn in 2017, up from €180mn in 2016. During 2014-2015, the local FDI companies returned (on an aggregated basis) €421mn and €141mn respectively. The equity contribution (including re-invested profit) of the same non-bank FDI companies declined to €3,1bn in 2017 from €3.9bn in 2016.

Speaking of the foreign financial groups operating in Romania, foreign-owned banks increased their capital by €720mn in 2017, compared to only €445mn in 2016 and €248mn in 2015. This might be explained by the rising aggregate profits posted by the banking system, since the largest part of the earnings have been re-invested.