The Financial Times
By Stefan Wagstyl and Thomas Escritt
Published: November 21 2007
Five years ago Raiffeisen International, the Austrian-based bank with the largest reach into eastern Europe, bought Casa Agricola, a struggling state-owned Romanian bank, for $45m and invested about $250m in its modernisation. Today, analysts estimate the bank could be sold for $2.5bn (€1.68bn, £1.22bn).
The rise in value is attributed to Raiffeisen’s success in overhauling Casa Agricola and to Romania’s soaring economic growth, rapid credit expansion and spiralling asset appreciation. Many business people in Bucharest see many similar success stories developing.
The country is now safely inside the European Union, and many investors feel there are profits to be made from banking, real estate and other sectors.
“We have only just begun,” says Diwaker Singh, managing director of Copper Beech, a UK-owned property developer, which has recently embarked on a €2.5bn five-year plan to build 16,500 homes.
The International Monetary Fund sees things differently. Concerned about the global credit market turmoil, the fund is warning about the dangers of economic overheating in Romania, citing a yawning current-account deficit.
Juan Fernandez-Ansola, the IMF representative in Bucharest, says: “In this over-optimistic environment we are trying to keep people alert to risks – not an easy task.”
Steven van Groningen, Raiffeisen Romania’s Dutch chief executive, treads carefully between enthusiasm and caution: “The long-term prospects are good. But in the short term, something has to give in the next year or two to get the economy to a better balance.”
Achieving a better balance is important for Romania and for the EU. Since 2000, gross domestic product has grown at an average rate of more than 6 per cent, the fastest rate in the Union outside the small Baltic states.
EU investors have piled into Romania, attracted by a market of 20m (eastern Europe’s second largest after Poland) and opportunities to establish low-cost export bases. Fuelled by privatisation, foreign direct investment last year exceeded €10bn, the region’s highest.
But now the economic warning signs are mounting. Inflation, which had been falling steadily in recent years, jumped to 6 per cent last month from a low of 4 per cent in July.
Rising world energy and food prices, compounded by drought in Romania, are playing their part. But so is soaring local pay, which is set to rise by about 25 per cent a year, or about 20 per cent in real terms.
The IMF calculates that while Romanian pay (averaging €7,000 a year) remains among the lowest in the EU, it has risen faster than anywhere else.
Mr Fernandez-Ansola says that, with productivity rising at less than 10 per cent annually, the increases are “unsustainable”.
Moreover, whereas in other ex-communist states pay increases are generally driven by private companies, in Romania the public sector is in the lead, thanks to strong trade unions, which have just forced a 28 per cent rise in the minimum wage.
Pensions are also soaring, with a 43 per cent increase now being implemented, and a further 30 per cent rise approved for early 2009.
Rising pay is helping to fuel a credit surge, particularly in home loans. Credit is set to grow 50-60 per cent this year, following 53 per cent in 2006.
The IMF warns that borrowers might be assuming too much risk, especially as about half the loans are in foreign currency, mainly euros. But bankers argue that overall debt levels are low at 30 per cent of GDP and that they are acting prudently, for example in requiring 25 per cent deposits for mortgages.
Manfred Wimmer, a senior executive at Banca Comerciala Romana, a subsidiary of Austria’s Erste Bank, says: “We are not worried about the speed of growth because it is from a very low base.”
But there is no doubt credit is financing soaring increases in imports, boosting this year’s likely current account deficit to 14-15 per cent of GDP – a level the IMF considers dangerous.
Last year the €10bn deficit was largely financed by privatisation-boosted FDI of €9bn. But this year’s forecast FDI of €7bn will fall far short of the likely €17bn deficit – leaving banks to finance the gap with credit, much of it short-term.
For the IMF this is unsustainable, particularly with global conditions worsening. But Bucharest-based bankers argue much of the credit is quasi-investment as it is provided in-house by multinational banks to their Romanian subsidiaries.
The IMF is urging the authorities to cool the economy. While it welcomes recent interest rates increases it remains worried about fiscal policy. The budget deficits – 1.5 per cent of GDP forecast for this year and 2.7 per cent planned for 2008 – are not huge in themselves. But the IMF says that in current circumstances they are too big.
Government officials say the IMF is exaggerating. Dorin Mantescu, director of macro-economic analysis at the finance ministry, says: “The current-account deficit is pretty high, but overall the economy is still performing pretty well.”
The minority National Liberal government of Calin Tarinceanu, prime minister, is too weak to take decisive action, following the collapse of its alliance with President Traian Basescu’s Democrats.
With parliamentary elections due next year, politicians are already focused on the polls. Liviu Voinea, director of the GEA think-tank, says: “What is needed is decisive fiscal reform. But the government can get through next year without it. Then we will have the election – and the politicians don’t care what happens after the election.”