Romania: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large domestic market
- Significant agricultural potential: wheat, barley, rapeseed, etc.
- Limited energy dependency on coal, oil, gas and uranium
- Large-scale renewable power generation
- Diversified and competitive industry thanks to an inexpensive workforce
- Demographic decline: low birth rate and emigration of well-trained youth
- Strong regional disparities in education, vocational training, health and transport; rural areas lag behind
- Low participation rate of Hungarian and Roma minorities, youth and women in the economy
- Large underground economy
- Inefficient agricultural sector
- Slow bureaucratic and legal processes; corruption
Moderate recovery in 2021
Heavily affected by the COVID-19 pandemic, Romania implemented restrictive measures in the spring of 2020 and had to reinstate some of them, albeit lighter, in the second wave in November. This, combined with the recessionary European context, dragged the economy into recession. It will rebound in 2021, supported, in particular, by the rebound in household consumption. In fact, household consumption, which accounts for 63% of GDP, fell by 7% in 2020 because of social distancing measures and declining incomes (increase in unemployment from 3.8% in 2019 to 7% at the end of 2020, loss of jobs). However, it has been encouraged by the government's support plan, with 75% of short-time working being covered by the government and the freezing of water, gas and electricity prices. In 2021, it is expected to rebound by 3%, driven by the relaxation of health measures, but will remain constrained by lower wage growth and an increase in the unemployment rate, barring favourable provisions in the 2021 budget. Moreover, after stagnating in 2020 thanks to the resilience of the construction sector, investment is expected to grow by 5% in 2021 and benefit from the Next Generation EU recovery plan, under which Romania will receive EUR 33 billion by 2023 (less the 12 billion it has paid into the fund). However, the absorption rate of EU funds is below the regional average due to administrative shortcomings. The investments will mainly concern infrastructure and residential construction. The industrial sector (28% of GDP) is estimated to grow by 7%, despite the slow recovery of the automotive sector (14% of GDP), thanks in part to the rebound in production in the energy sector. Finally, after falling in 2020, foreign trade will pick up again, but its contribution to growth will remain negative. In fact, while exports, which account for just under 40% of GDP, are expected to pick up in 2021 thanks mainly to exports of services (telecommunications and IT), machinery and vehicle exports (42% of exports) will struggle.
High government deficit; stabilization of the current account deficit
In March 2020, the government announced a support plan equivalent to 3.2% of GDP that would allocate more funds to the health sector, cover short-time work and support companies in difficulty. These measures, combined with the automatic increase in spending and the 14% increase in pensions, have widened the deficit and increased the public debt (50% external). In 2021, the deficit could be reduced somewhat, subject to the content of the 2021 budget. The debt will continue to increase, but will remain moderate. In addition, public finances will receive EUR 79.9 billion (45% of 2019 GDP) under the EU's Multiannual Financial Framework 2021-2027, of which 14% will be distributed in 2021.
The slight reduction in the current account deficit in 2020 is largely due to the reduction in the trade deficit. Indeed, the fall in exports was more than offset by the fall in imports due to the decline in domestic demand. Furthermore, European aid has increased the transfer surplus, further reducing the current account deficit. In 2021, with the recovery in external demand expected to exceed domestic demand, the trade deficit will narrow again. Moreover, remittances (3% of GDP) are expected to pick up when activity in the countries of expatriation resumes (Spain and Italy in particular). The 2020 deficit has been partly financed by several international aid packages, including EUR 400 million from the World Bank. In 2021, given the slow recovery of FDI, the deficit will be largely financed by foreign borrowing and portfolio investment.
At last political stabilization?
The legislative elections of 6 December 2020 could put an end to the long period of political instability (5 governments in 4 years) caused by a stormy partnership between President Klaus Iohannis, supported by the center-right National Liberal Party (PLN), and the Chamber of Deputies dominated by the social democrats of the PSD, especially over justice and corruption. The elections placed the Social Democratic Party (PSD) in the lead with 28.9% of the vote, but with a turnout of around 30%, showing the population's disillusionment with its political class. The National Liberal Party (PNL) of Prime Minister Ludovic Orban (since 2019), long a favorite in the polls and winner of the municipal elections of September 2020, came in second, ultimately punished for its poor management of the health crisis. However, the coalition formed by the PNL and the Save Romania Union (USR Plus), which is reformist and very committed to ending corruption, allowed them to gain power, putting an end to their partnership.
In addition, since the country joined the EU in 2007, the European Commission has had a cooperation and verification mechanism in place to help the country meet European standards for efficient and transparent public authorities, an independent judiciary and the fight against corruption. However, the Commission has repeatedly singled out the country for its legislation in this area. In fact, since laws adopted in 2017 and 2019, promoting the opacity of the system, the country’s index is at 44 out of 100 and ranks 70 out of 180 in the 2019 Transparency International corruption perception ranking.