Saturday, May 2, 2009

Romania: Hard Landing

Oxford Business Group Latest Briefing

Sidetracked by the international financial crisis, much of the Romanian economy is facing a lean year in 2009, with the country's once-booming construction industry among those that will be hardest hit. 

According to the Romanian Association of Entrepreneurs in Construction (ARACO), the industry undertook projects worth 
13.9bn in 2008, though this figure is set to plunge this year as companies experience difficulties in securing credit lines, domestic demand dries up and foreign investment in property dwindles. 

Figures released by the EU's statistics bureau, Eurostat, on April 17 showed the decline in Romania's construction sector in February was much sharper than in any other member states. While the EU-wide fall in construction output was 1.8% compared to the January result, Romania recorded an 8.6% drop, which came on top of a 6.4% retreat in the first month of the year. 

This trend is expected to continue. While the latest government estimates, released on April 11, have forecast a 4% decline in GDP for the year, a recent report by Business Monitor International predicts that Romania's construction sector will contract 14.8% in 2009. 

Though the government has obtained guarantees of some 
25.9bn in assistance from the IMF, the EU and other international agencies, it will take time for the trickle down effects of this funding to reach the construction sector, given the somewhat lengthy period needed to launch new projects or restart those currently suspended. 

A report by PMR Consulting, issued in mid-April, said 2009 would be a difficult year for the sector, despite the flow of financial aid, with output expected to decline sharply before a slow recovery that will be stimulated, in part at least, by spending on infrastructure. 

"The most affected year will be 2009, but the following few years may not see a major recovery if the international economic circumstances do not improve," according to Robert Obetkon, the senior construction market analyst at PMR. 

While the residential segment will be less affected, thanks to state 
housing projects, many new office and retail developments will be postponed, and few completed this year due to tightness in the credit market, he said. 

"Developers are also facing financing difficulties and in 2009 only a few projects will be delivered, generally those which were either delayed from last year or are in an advanced construction state," said Obetkon. 

The industry itself is looking at measures to overcome future credit shortages, with plans unveiled in early April to establish a bank to provide financing for the construction sector. Announcing the plan, the 
General Federation of Trade Unions president, Dan Cristescu, said it was hoped the bank would be open for business by 2012, with its required capital coming from local construction firms. 

While this proposal may well offer a funding alternative to Romania's builders in the future, it does little to provide them with comfort in the present. 

In early April, the ARACO president, Laurentiu Plosceanu, warned that almost 75% of Romania's 380,000 
construction workers could be laid off this year unless the government moved quickly to pay the balance of its debts, estimated at around 
1.2bn, to the building industry. 

The association also warned that if state debts are not cleared quickly, up to 35% of Romania's small and medium-sized construction firms might have to declare bankruptcy. 

There has already been a steep rise in the number of bankruptcies among construction firms, with ARACO claiming there had been a 20% increase in the first three months of 2009 compared to the same period in 2008. The rising tide of bankruptcies this year comes on the back of a 56.3% jump in insolvencies in the sector last year, when 1666 companies went out of business. 

There is some good news for the building trade, however, with the price of construction materials and land expected to fall as a result of the downturn. While lower materials costs are a boon, cheaper land prices could be a mixed blessing. For those firms looking to buy land for new projects this could be an advantage, but for those will large existing 
land banks, bought when the market was high, it will be harder to pass on these costs to prospective customers. 

According to a study conducted by Visionwise Consulting in mid-April, land prices across Romania are down by just under 15% from a year ago, though in and around Bucharest values have held better, remaining at a similar level to those in March 2008. 

All indications are that Romania's construction industry will fall further and faster that most other sectors of the economy and take longer to recover, despite the government offering additional funds for infrastructure projects in an effort to stimulate the economy.

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