Tuesday, September 29, 2009

Bucharest battles against the crisis

By Thomas Escritt
Published: September 28 2009
The Financial Times

There is more elbow-room in the upmarket night clubs of northern Bucharest than this time last year. Flashy bars spent recent years competing to outdo each other in opulence. One installed chandeliers, another hired international DJs, until a third outdid them by installing a swimming pool. They came to symbolise the extravagance of Romania’s boom years.

After decades of oppression under Nicolae Ceausescu, the communist dictator, the 1990s were a time of disorder and wasted opportunities, when the country missed out on the foreign investment that buoyed its central European neighbours.When the boom finally came, young professionals oin Bucharest had more money than ever before.

As newly-arrived banks, manufacturers and property investors sent salaries and real estate prices soaring, people flocked to these self-consciously extravagant places, often spending sums that would make Londoners blush.That was then. The country has suffered badly in the fallout from the credit crunch. Household lending, which had been growing at 60 to 80 per cent a year over the past three years, collapsed as markets lost confidence in the banks’ ability to continue the credit expansion.

Exports fell sharply, and the economy shrank 6.2 per cent year-on-year in the first quarter of 2009 and was down 8.7 per cent in the second, losing all the gains it had made during the final half of 2008.However, while there may be more room, the clubs are far from empty: Romania may have turned to the International Monetary Fund and the European Union for a €20bn bail-out in the spring, but it seems to have escaped the worst effects of the crisis.

“I’m reasonably optimistic about the numbers,” says Dominic Bruyn seels, chief executive of BCR, a subsidiary of Erste Group, the Austrian bank.Industrial production has risen slightly, he notes, and with an IMF package in place to stabilise the currency, a degree of certainty has returned to business planning. But 2009 is still going to be tough.By the government’s own estimate, the economy could shrink 8.8 per cent overall this year and the projected budget deficit, after several revisions, is now expected to hit 7.2 per cent.

Others are more pessimistic.Liviu Voinea, a partner at the Group for Economic Analysis, a think-tank, says: “We had the largest GDP growth in our history last year, and now we are falling from the peak. We could fall 10 per cent this year.”When the crisis passes, the factors that made the country an attractive investment destination will remain. With a population of 22m, Romania has a GDP per capita of 15 per cent of the EU average, compared with 25 per cent in Poland and 35 per cent in Hungary. Its domestic credit levels are also low, at 42 per cent of GDP agaisnt 7 per cent in Poland.It is the second largest of the EU’s new member states and has an underdeveloped market: the country has just 167 passenger cars per 1,000 population, compared to 351 in Poland and 566 in Germany, leaving plenty of room for growth.

The €30bn in funding that the EU intends to provide before 2014 should help.Even if it proves to be a temporary dip, the end of the boom came at a bad time for the man most closely associated with it – Traian Basescu, the president. He will probably stand for re-election in November after completing one five-year term.An impulsive and divisive figure, he made himself popular at home and abroad with his strident talk of getting to grips with corruption. But along with much of the political class, he lost credibility after insisting the country would not be affected by the crisis and would not need to turn to the IMF.

He remains the favourite to win, but many business leaders privately express the hope that a less impetuous successor might produce some stability. Yet even his challenger, the social democrat Mircea Geoana, acknowledges that any successor will have to be as frenetically activist as Mr Basescu.“He changed the character of our republic for good,” says Mr Geoana, who argues that the “pro-cyclical” policies of the past five years have left the country more indebted and in worse shape than is necessary. With elections imminent, the government, a grand coalition of Mr Basescu’s democrat liberals and Mr Geoana’s social democrats, has little room for manoeuvre. Led by Mr Basescu’s ally, Emil Boc, as prime minister, it is struggling to implement the spending cuts demanded by the IMF.Inevitably, this is not a pain-free process.

Although public sector protests have been relatively muted, one group with the power to create trouble has done so. Despite a consensus among legal experts that their action is illegal, judges have laid down their gavels in a court strike that started at the beginning of the month. Lidia Barbulescu, president of the supreme court, says the conditions under which judges have to work are a “humiliation” and that proposed public sector pay cuts will merely make conditions worse.

Mr Voinea worries that without real structural reforms, Romania will emerge limping from the crisis. “Our backs are to the wall,” he says, adding that the public-sector wage bill has to be cut severely.An inefficient public administration has difficulty co-ordinating investment projects, meaning that years of boom- time earnings have been squandered on salaries and consumer spending. The country still has only two motorways, at a time when businessmen say poor infrastructure puts the country at a disadvantage.

There are a number of signs that the government is having trouble paying its bills: Small businessmen complain that tax inspectors are overreaching in their eagerness to raise revenue, while banks report that small business clients are being driven to the brink of bankruptcy by long delays in VAT reimbursement – although the government says a computer system has speeded things up.

Mugur Isarescu, governor of the National Bank of Romania, says: “Economic growth was based in large part on a high level of imports, which created huge VAT revenues. But if imports fall 50 per cent, revenues will fall sharply.”The IMF is satisfied with the progress Romania has made since signing up to a two-year support programme in March, although the ride has been rougher than anticipated.“The government is making progress on the economic programme. The targets had been met at the end of June, but additional budget adjustments are needed because the recession was deeper than most people expected,” says Tonny Lybek, country director for the IMF.

Nonetheless, perhaps bowing to the inevitable, the IMF has agreed to transfer its next tranche of funding directly into the cash-strapped finance ministry’s accounts, rather than channelling it through the central bank, as is customary.Mr Isarescu says: “It doesn’t make much difference, because it ends up in an account at the central bank anyway, but it makes it much easier.”

Dorel Sandor, a public affairs consultant, says the government has performed acceptably, given the financial constraints and the upcoming elections: “Mr Boc is a good caretaker, and that’s not a bad thing in a crisis.”For some, though, the prospect of a few hard years is salutary. Dan Pascariu, chairman of the Romanian subsidiary of Unicredit, the Italian bank, says: “This younger generation, who were children until the revolution [against communism in 1989], have seen only growth in their adult lives.“I see in them a sense that they deserve and know everything. This cold shower is welcome, because we’re learning crisis-management.”

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