Romania: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large domestic market
- Significant agricultural potential: wheat, barley, colza, etc.
- Limited energy dependence (23%) thanks to coal, oil, gas, and uranium
- Large-scale renewable electricity production (37%)
- Diversified and competitive industry thanks to cheap labor
- Leu stable against euro
- Demographic decline: low birth-rate and emigration of educated youth
- Serious regional disparities in terms of education, vocational training, healthcare, and transport; rural regions lag behind
- Low participation rate for Hungarian and Roma minorities, young people, and women in the economy
- Large informal economy (28%)
- Inefficient agricultural sector (11% of GDP)
- Slow bureaucratic and legal processes, corruption
- Weak public revenues and tax evasion
Lively Domestic Demand
After increasing to a buoyant level in 2016, GDP growth strengthened even further in 2017. The main driver of growth continues to be domestic demand, with household consumption (70% of GDP) as the leading element: private consumption increased by nearly 10% over the first three quarters of 2017 compared to the same period in 2016. Once again, households are set to benefit from employment increases, increases in wages and pensions – both in the private and public sectors –, and from falling tax rates.
Although set to remain the main growth driver, consumption is, however, likely to slow this year because of the declining impact of the tax cuts and the return of inflation, which is connected to the overloading of existing production capacities. Wages are being driven by the increasing scarcity of labor, which is a result of emigration and an aging population, despite the financial incentives being used to encourage mobility among the unemployed and reduce long-term unemployment. Labor shortages remain a concern for companies and trigger further compensation increases.
Investment (24% of GDP) has been relatively stable. However, a gradual recovery of the projects co-financed by the EU funds is taking shape, given the context of low interest rates and positive growth prospects. These will likely be supported by construction, telecommunications and IT. Investment aid (0.52% of GDP) is favorable to SMEs. Despite weak demand, due to bureaucracy and administrative failures at the local level, European funds will help maintain moderate growth in public investment, but will not be enough to fill infrastructure gaps. In addition, the large labor deficit in the construction sector could hinder the growth of capital investment and, hence, the full recovery of the sector. The government will continue to vouch for half of all new buyer loans to encourage credit and lower costs. Given the high percentage of bad loans (8.3% in the second quarter of 2017), which shows a gradual decline, and difficulties to put collateral in place, caution is still required within banks, of which 90% are subsidiaries of an Austrian, Dutch, French or Greek group. These will continue to repay their debts to parent companies while constituting a national deposit base. Exports (39% of GDP) will probably increase at a reasonable pace, but lower than that of imports in the face of strong domestic demand. Sales of cars (Dacia and Ford) and tires (a quarter of exports), as well as wood, fertilizers, metals, drugs, machinery, and clothing, will benefit from any increase in European demand. Exports of grains and oilseeds will depend on harvests.
Costly fiscal measures resulted in a significant widening of budget deficit. Cutting the standard VAT rate by an additional one percentage point, abolishing the extra excise duty on fuel, and the special construction tax – led to an even higher deficit in 2017. Moreover, additional wage hikes in the public sector will contribute to this as well. Nevertheless, in late 2017, the government announced its intent to keep the general government deficit below 3% of GDP. Measures have included cutting public expenditures for investments, as well as a request for transferring state-owned companies’ profits to the treasury. The government will strive to ensure that the 3% deficit threshold is not exceeded, so as not to come within the scope of the European Excessive Deficit Procedure.
The trade and current account deficits widened further in 2017, Exports increased strongly but imports surged even higher. Wage increases, which have surpassed productivity growth, are a threat for the country’s competitiveness position – however, labor costs levels still remain significantly lower than those in Western Europe.
The December 2016 elections brought to an end the transitional technical government installed in November 2015, following the resignation of Social-Democrat Prime Minister Romania Victor Ponta, implicated in a corruption scandal. The Social-Democrats of the SDP won 46% of the votes – a victory over the Liberals – and retained their majority in Parliament. However, the conflict related to the fight against corruption, which led to street protests in early 2017, contributed to the replacement of the Sorin Grindeanu cabinet after just six months in office. In June 2017, Mihai Tudose became the prime minister of the new cabinet led by the Social Democratic Party (PSD), although the real power still lies in the hands of party leader Liviu Dragnea. The latter cannot participate in the government due to a suspended two-year sentence for ballot-rigging. In November 2017, Mr. Dragnea has been indicted for alleged fraud of EU funding, which is the third file opened by the National Anti-Corruption Directorate (DNA) against him.