Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. - Source: Coface

Business Climate Rating

A3
The business environment is relatively good. Although not always available, corporate financial information is usually reliable. Debt collection and the institutional framework may have some shortcomings. Intercompany transactions may run into occasional difficulties in the otherwise secure environments rated A3.

Strengths

  • 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

Weaknesses

  • 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
  • Inefficient agricultural sector
  • Slow bureaucratic and legal processes; corruption

Current Trends

Solid but less vigorous demand

The economic boom of 2017 already began to fade out in 2018. Private consumption is not likely to accelerate again in 2019, although its solid level and substantial share in the economy (63% of GDP) will keep it as the main growth driver. The ongoing improvement in the labor market, with the unemployment rate dropping to 4.1% in September 2018, and further growth of wages (with the minimum wage increasing by almost 8% from 2019) will continue to support household spending. 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. At the same time, accelerated inflation has already halved the growth of real wages in 2018 compared to a year prior. Previously, household consumption was elevated by implemented fiscal stimulus measures, including tax cuts, minimum wage increases, and public sector wage hikes. However, these tax cuts have faded away and contributed to higher consumer prices, accompanied by inflation pressure caused by excess demand.

Labor shortages remain a concern for companies and trigger further compensation increases. Moreover, labor cost increases have been far ahead of productivity growth. The pressure coming from growing wages has been partially weakened by the transfer of social security contributions from employers to employees (contributions were changed from 22.75% and 16.5% to 2.25% and 35%, respectively).

A gradual pick up of projects co-financed by EU funds brings support for investments, which recovered in 2018. Nevertheless, it is likely they will be subdued due to the government’s attempt to keep the fiscal deficit under control. In any case, companies extending capacities, as well as an increase in non-residential construction, telecommunications, and computing, will keep investment growth positive. Imports are likely to remain more dynamic than exports, meaning the contribution from trade will remain negative. Cars (Dacia and Ford) and tires, together with wood, fertilizers, metals, medicines, machines, and clothing remain an important part of Romanian exports. Production and exports of agri-food products have been negatively affected by periods of droughts and floods, as well as a swine fever epidemic.

Public and external accounts will remain weak

The budget deficit has widened over recent years and is projected to rise further. Significant increases of salaries in the public administration, as well as in the health and education sectors, have contributed to a higher fiscal cost. Moreover, the flat personal income tax rate was lowered from 16% to 10% in January 2018. The pension indexation is set to increase in both 2019 and 2020 (by 15% in September 2019 and 40% in September 2020). The August 2018 budget revision assumed increasing of both revenues and expenditures. If the government is less effective in conducting investments, budget deficit figures could be lower as a result. The current account deficit is expected to increase further as a result of deteriorating foreign trade balances of goods and services resulting from robust internal demand. The primary income deficit improved in the first half of 2018supported by transfers from Romanians working abroad. More than a half of the deficit was financed by rising FDI and inflows on the capital account contributed by allocations from EU funds. The external debt widened in the first half of 2018 as a result of increasing short-term external debt and the latter’s coverage by foreign exchange reserves dropped to 76.2%, against 87.2% at end-2017.

Political tensions

In January 2018 Mihai Tudose, who took over the position of the Prime Minister in 2017, was forced out from office by his own ruling Social Democratic Party (PSD) due to disagreements with the party leadership. Subsequently, the government of existing coalition of PSD-Alliance of Liberals and Democrats was sworn in with the Prime Minister Viorica Dancila. The real power is still assumed to be in the hands of PSD leader Liviu Dragnea, who cannot participate in the government due to criminal investigations. In November 2018, the PSD decided to reshuffle a part of ministers in the cabinet as a result of internal tensions within the party. At the same time, the justice minister remained unchanged, signaling a continuation on the path of controversial reforms to the justice laws. Indeed, the European Parliament criticized the Romanian authorities’ initiatives to change these laws and criminal code, as well as the breaching of human rights at the crashing of demonstrations in August last year. In the past, the Romanian political scene has experienced various portfolio changes – however, uncertainties related to domestic politics still pose the risk of instability.

Source:

Coface (02/2019)
Romania