Romania’s economy is set to be among the fastest growing in Europe this year, with expansion largely fuelled by consumption, driven in turn by tax cuts and public sector pay rises.
While these have raised concerns from the International Monetary Fund (IMF) and other observers over Romania’s growing budget deficit, they have resulted in an ongoing boom in consumption that shows no signs of abating.
This is set to spur on GDP growth to 4.2% in 2017, the IMF has estimated – putting Romania second only to Iceland within Europe. The IMF recently raised its growth projection from the 3.8% it forecast in October 2016 – though it is still below the highly optimistic 5.2% expected by the Romanian government.
Retail sales have been booming in Romania, expanding by a total of 42% since January 2012, or an average of 9.2% per year. This was partly a consequence of the decision to slash VAT on food from 24% to just 9% in June 2015, followed by more modest cuts to the general VAT rate, which was most recently lowered to 19% in January.
Investors continue to show confidence that the Romanian consumer boom will continue. 2016 saw the local retail sector’s biggest ever deal, when Mid Europa Partners bought supermarket chain Profi Rom Food from fellow private equity investor Enterprise Investors for €533mn. Mid Europa partner Nikolaus Bethlen said at the time that the deal underscored the firm’s commitment to Romania, and that Profi “has great potential to grow in the years to come, as Romania has many more areas to take modern retail to”. In March, the European Bank for Reconstruction and Development (EBRD) said it would support the expansion of the supermarket chain with a €25mn equity investment.
Meanwhile, Delhaize’s Mega Image, which has the largest supermarket network in Romania, announced plans to expand in the west of the country. Other retailers planning to grow are Germany’s Rewe, which exited its XXL stores but aims to double its Penny Market network to 400 units by 2025, and French Auchan, which will open 15 convenience stores at OMV Petrol filling stations in 2017.
The expansion is by no means limited to food retailers. Elsewhere in the sector, DIY chain Dedeman became the first company controlled 100% by Romanian entrepreneurs to exceed €1bn in turnover in 2016, and it is planning to open several new stores this year. Altex, Romania’s largest electronics, IT and home appliances retailer, has announced ambitious hiring plans for this year. And Enterprise Investors plans to double the size of its toy retailer Noriel’s store network in the coming years.
While e-retail still lags behind Western Europe, Romanians are increasingly going online to make purchases. Research from local financial information firm KeysFin showed in December that e-commerce turnover tripled between 2010 and 2015. The trend appears to have continued in 2016. On Black Friday 2016, Romania’s biggest online retailer eMag made 1.1mn transactions worth a total of RON300mn.
This in turn has driven demand for logistics space from both traditional and online retailers, says real estate consultancy JLL. "Industrial market continues to be very dynamic in terms of new supply and demand. The expansion of the retail companies and the strong increasing consumption are the main drivers of the sector,” the firm said on April 10.
Alongside retail, “the IT market is today really driving real estate, as one of the major drivers of economy,” David Hay, head of AFI Europe Romania, told the SEE Property Forum 2017 in Bucharest on March 29. Romania is now well established as a destination for international outsourcing and shared services firms, and the strength of the IT sector has helped spawn a growing number of local startups.
The healthy expansion of the retail and IT sectors has helped bring down unemployment to its lowest level since the start of the international economic crisis. Confidence in the local economy is reflected in the strong hiring intentions of firms in Romania, of which almost one in three plan to add to their payrolls in April-June, according to ManpowerGroup’s latest Employment Outlook Survey. For the first time, the survey showed positive hiring perspectives across all regions and sectors.
However, while the economy continues to grow, there are worries that the combination of spending and tax cuts – as outlined in the ruling Social Democratic Party (PSD) manifesto ahead of the 2016 general election – will have a damaging effect on fiscal stability.
Specifically, if the government fulfils all its election promises, these are expected to push the budget deficit above 3% of GDP, thereby putting the country into the EU’s excessive deficit procedure. The IMF forecasts a budget deficit of 3.7% of GDP this year, widening to 3.9% in 2018. Hiking public sector pay is likely to be offset by a continuing low level of public investment, with a damaging impact on longer-term growth.
Meanwhile, Moody’s lowered its outlook on Romania’s Baa3 issuer rating from positive to stable on April 21, citing the country’s expansionary fiscal policy and failure to take advantage of the “favourable macroeconomic and financial market conditions to bring its public debt onto a clear downward trajectory and to restore the fiscal buffers it lost in the aftermath of the crisis”.
For more information on our regular reports on Romania and other countries, see: www.intellinews.com/reports.