Romania: Risk Assessment
Country Risk Rating
Business Climate Rating
- Large domestic market
- Significant agricultural potential: wheat, barley, colza, etc.
- Limited energy dependence thanks to coal, oil, gas and uranium
- Large-scale renewable electricity production
- Diversified and competitive industry thanks to cheap labor
- 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
Solid but less vigorous demand
The economic activity is expected to slow slightly this year. Private consumption will ease, although its solid level and substantial share in the economy (63% of GDP) will keep it as the main growth driver. The ongoing improvement on the labor market, with the unemployment rate dropping to 3.8% in mid-2019, and further growth of wages and pensions, 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. To tackle that, the government intends to attract an inflow of immigration. Quotas for non-EU foreign workers have been increased, while Vietnamese immigrants are likely to come to the Romanian labor market based on an agreement between the two governments. Despite the tight labor market, wage growth will be lighter compared to previous years due to the economic slowdown, while effects of previous public sector wage hikes and increases of minimum wages will fade out.
Next to household consumption, fixed asset investments are expected to bring a solid contribution to growth. Their increase will be supported by construction and infrastructural investments, partly co-financed with EU funds. Already last year residential building increased strongly.
Net exports will improve thanks to a less dynamic private consumption and slower imports consequently. On the other hand, exports’ growth will be limited due to the global trade downturn and deteriorated prospects of main export destinations. Therefore, the contribution of next exports to GDP growth is likely to remain negative but less so. The manufacturing sector benefited from cost competitiveness supporting its exports, which however, are now suffering from sluggish foreign demand. Although the automotive sector is still strongly fuelled by rising Dacia car sales both on domestic and foreign markets, other manufacturing sectors have suffered from sizeable increases in wages (expanding faster that the labor productivity growth), mostly hitting textiles, leather and furniture sectors.
Public and external accounts deficits to widen more
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. Indexed pensions increased by 15% in September 2019 and should rise again by an additional 40% in September 2020. Wages and social benefits are estimated to have absorbed above 60% of last year’s budget expenditures. Upcoming elections (local and parliamentary) in 2020 are likely to maintain the double-digit wage growth intact, at least in the public sector. Moreover, it will also support public investments that continue increasing thanks to an acceleration of spending on projects co-financed by EU funds, as we get closer to the end of the current programming period (2014/2020). The majority of the fiscal deficit remains externally financed, with yields of sovereign bonds roughly double those of Hungary, which are rated only slightly higher than Romania (10-year bonds’ yields of 2% and 4.2%, respectively in August 2019). The current account deficit is expected to increase further as a result of deteriorating trade balance in goods resulting from solid internal demand. The services balance and the secondary income balance were on the positive side. The current account deficit is expected to be financed from bond issues as well as increasing capital transfers of the EU, as well as FDI. On the other hand, the general government debt remains at relatively low levels but it is likely to exceed 40% of GDP in the course of next year.
Romania’s government lost a no-confidence vote in October last year, as the Social Democratic Party (PSD) lost its coalition partner ALDE and thus the governing majority. Previously, PSD had been shaken by weak results in the European Parliament elections in May 2019, even though it had gotten rid of its controversial leader, Liviu Dragnea, who faced criminal investigations and was imprisoned for corruption. Subsequently, the PSD-led government had been reshuffled and had given up controversial initiatives to reform the legal system, which had irked EU institutions. The leading party of the opposition, the National Liberal Party (PNL), formed a minority interim government of Prime Minister Ludovic Orban, which won a confidence vote (with the support of five parties: PNL, USR, ALDE, PMP and UDMR) in November 2019. Next parliamentary elections are scheduled for November 2020. However, a possibility of early elections cannot be ruled out.