Political turmoil, COVID-19 wave subdue investors’ fundamental optimism in Romania

Political turmoil, COVID-19 wave subdue investors’ fundamental optimism in Romania
By Iulian Ernst in Bucharest September 30, 2021

A series of polls and surveys point to the conclusion that investors share robust confidence in the Romanian economy, but the political turmoil and, to some extent the potential impact of the fourth wave of the pandemic, are toning down their optimism.

The future of Prime Minister Florin Citu’s government is uncertain after the junior partner of the senior ruling National Liberal Party (PNL) recently withdrew its support for the government and filed a no-confidence motion, leaving Citu temporarily at the helm of a minority cabinet. A second no-confidence motion, which MPs are due to vote on on October 5, has since been filed by the opposition Social Democratic Party (PSD). 

Meanwhile, Romania, which has one of the lowest vaccination rates in the EU, saw the daily number of new coronavirus (COVID-19) cases soar to a record 11,049 on September 28. 

In this context, the macroeconomic confidence index compiled by the Romanian CFA Society has decreased for the second month in a row, driven by the sub-index of expectations (the other sub-index reflecting current conditions), according to the latest monthly poll published in September. It remains close to its historic high, though.

The index edged down by 0.9pp m/m to 73.6 points (+40.3 points y/y) on a 0-100 scale with 50 points reflecting balanced sentiment. Nevertheless, the index remains close to the all-time high and analysts’ expectations regarding this year’s economic growth.

Thus the analysts expect 7.2% GDP increase this year (versus 6.8% in August).

The forecast for the year’s public deficit deteriorated slightly to 6.9% of GDP (6.8% in August), but this is still below the government’s 7.1% of GDP target.

Public debt is seen at 53% of GDP within 12 months.

"Against a background of caution generated by the fourth wave of the coronavirus pandemic, the macroeconomic confidence indicator dropped for the second consecutive month but remains at a high level, close to the historical maximum, which indicates confidence in future economic developments," CFA Romania vice president Adrian Codirlasu said.

In the context of rising inflation (a 4.38% rise of consumer prices over the next 12 months), analysts anticipate an increase in money market interest rates over the one-year forecast period, including at least two refinancing rate hikes operated by the National Bank of Romania (BNR).

A separate survey carried out by the Foreign Investment Council (FIC) finds that investors’ sentiment remains robust.

The expectations of the Romanian business environment remain optimistic and are in line with those seen in March 2021, according to the Business Sentiment Index (BSI) research, organised by the FIC in September.

Research has shown that there is a general positive feeling about the Romanian business environment, in line with international developments, especially in terms of the business environment outlook.

The share of companies expecting their business to grow has constantly advanced from 22.7% in September 2020 to 37.8% in September 2021. Nevertheless, the share of companies expressing optimism at the end of March 2020 (one can assume the data was collected in advance, therefore it does not reflect the March 16 lockdown) was as high as 42.9%.

According to the September 2021 BSI poll, 80% of companies expect their financial performance to improve, especially in connection to the domestic market. Almost half (46.7%) of them expect their exports to remain at similar levels, a percentage similar to those seen in 2019, prior to the pandemic.

“From an investment perspective, we see that companies' confidence in business opportunities has maintained because more than 53% of companies have investment plans to implement during the next 12 months. This figure marks a new peak,” the FIC said.

Following a survey among its members, the American Chamber of Commerce (AmCham) Romania warns that investors’ confidence level is depressed due to the political turmoil.

AmCham Romania calls for the return of the political class to the commitments it made to society and to the economy, in order to reverse the depreciation of confidence in the investment and business climate.

Confidence in the climate, according to an AmCham survey, has declined to the minimum levels registered in the first half of 2020, when Romania was hit by an acute lack of predictability generated by the first wave of the pandemic.

According to the survey, the share of companies that see the investment and business environment as “precarious & weak” has increased from 14% in July to 38% in September.

Conversely, only 23% of the companies see the environment as “good and very good” in September, compared to 49% in July. The share of neutral opinions slightly increased to 39% from 37%.

Amid the high uncertainty at the moment, what is certain is that recovery and resilience plan (PNRR) represents a historic opportunity for Romania and must be the beginning of an accelerated and sustained path towards recovering major gaps in strategic areas and towards sustainable development of the Romanian economy and society, AmCham stressed.