Romania: Risk Assessment
Country Rating1
Rating: B
Business Climate Rating1
Rating: A4
Risk Assessment2
A constrained recovery
Romania's GDP continued to contract in 2010 while recoveries were in process in most Central European countries. A recovery is expected to effectively begin in Romania in 2011 but at a very moderate pace, constrained by the scale of the private debt accumulated these past years and which financed an unsustainable current account deficit. Only a mild consumption recovery appears likely with households continuing to focus on debt repayment. Both unemployment and inflation are expected to remain above the levels prevailing in the rest of emerging Europe. Incomes have moreover been growing at a markedly slower pace under the effect of restrictive fiscal policies. Foreign trade will not contribute to the recovery with a sharp rise expected in capital goods imports that will keep the current account deficit at a high level. Investments are, however, expected to rebound sharply amid the overall improvement in the health of Romanian companies: a marked improvement is expected on average in the telecommunications, para-oil, chemicals, and pharmaceutical sectors. Risks will remain high, however, in construction, textiles, metallurgy, and distribution, affected by the repercussions of two years in recession.
Difficult fiscal adjustment
In March 2009, Romania had to seek assistance ($20 billion) from the IMF, European Union, and other multilateral institutions. The initial tranches of international aid were focused on increasing foreign exchange reserves and maintaining a stable exchange rate. External financing needs will remain high in 2011 due to persistent imbalances in the current account. Romania continues to attract substantial direct investment albeit far below the levels prevailing just before the crisis. Continued multilateral financial support will thus be crucial to financial stability. Although a sharp reduction in the fiscal deficit is expected, the pursuit of economic policy and the objectives dictated by the IMF has lacked consistency and implementation of reforms in the public sector has been lagging. Despite the increase in the VAT rate to 23%, fiscal revenues remain undermined by an informal economy evaluated at 25% of GDP. Better absorption of community funds is also a priority in this context of financial constraints.
A government with a weak electoral base
Elections for parliament are scheduled late 2012 and for the presidency in 2014. The current government has depended on support from independent parties, which has proven very volatile. It is uncertain whether the early elections likely to be held in 2011 can resolve the question of governmental stability since they may give rise to another fragmented coalition. In this context, there have been systematic delays on implementation of unpopular reforms, insisted on by the IMF, intended to consolidate public-sector finances and those demanded by the European Commission focused on improving governance.
2011: risks remain high in construction, textiles, metallurgy, and distribution, which have been subject to the repercussions of two years in recession.
Strengths
- Attractive destination for foreign investors thanks to a large domestic market
- Brighter economic outlook as a result of the country's integration into the European Union
- Move upmarket by exports
- Low public sector debt burden
- Well-capitalized banking sector
Weaknesses
- Twin current-account and fiscal deficits
- Heavy dependence on foreign capital inflows
- Exposure of private sector to exchange rate risk
- Political instability that undermines Romania’s capacity to implement policies prescribed by the IMF
- Lagging pace of reforms in the public-sector
- Current account deficit still high