Friday, February 5, 2010

Romania: Construction Contraction

Oxford Business Group Latest Briefing

4 February 2010
While the Romanian economy contracted by some 7% last year, the withering of the construction sector was far more dramatic. According to data released in late January by Eurostat, the statistical office of theEuropean Union (EU), output in the Romanian construction sector fell by 24.4% for the 12 months ending November 30, the steepest fall across the EU zone.

In part, the reversal of the sector's fortunes is due to the sharp fall off in demand for new business space, with investments in non-residential developments such as office and retail construction all but drying up in 2009. There was also a steep decline in housing construction, largely due to banks' reluctancy to give out credit for much of last year.

According to a report issued by the National Institute of Statistics at the beginning of January, the number of construction permits for residential buildings dropped by 20.8% year-on-year in the first 11 months of 2009. In November, the number of permits for new residential building dropped by 15.6% compared to the previous month, with 3463 licences being issued, the report said, while just 37% of housing projects started in Bucharestbetween 2006 and 2008 had been completed by the end of July 2009.

Though keen to promote a return to growth, Romania's government has been limited in its options, having little room to maneuver when drafting the 2010 budget as it sought to ease concerns of the IMF and the EU over excessive spending.

In its budget, passed by the parliament in late January, the government of Prime Minister Emil Boc had to commit to reducing the state deficit to 5.9% of GDP, down on the 7.3% posted for 2009, put a freeze on increasing wages and state pensions, and reduce public servant numbers by up to 100,000 so as to meet IMF and EU requirements for the release of loan funding.

The EU and the IMF had demanded Romania curb spending before resuming payments from a $27.8bn support package, suspended in October after the government failed to implement promised austerity measures.

However, though being restricted in the budgetary largesse it could distribute, the government was able to throw a bone to the hard-hit building sector, making a 5% cut to the value-added tax (VAT) applicable to construction costs.

The reduction in the tax will be felt by the Treasury, with Gheorghe Gherghina, the state secretary at theFinance Ministry, saying on January 10 that the lowering of the VAT rate would reduce revenue by $328m.

The budget also factored a return to growth in 2010, with GDP forecast to expand by 1.3%. Though at least some of this recovery will depend on the speedy release of funds by international lenders.

Despite the numerous challenges, there are some signs that the building industry is starting to pick up, though it will have a long way to go before it returns to pre-crisis levels. According to the Eurostat report, output in the Romanian construction sector increased by 2.9% in November 2009 compared to the previous month. The result outstripped the overall performance of EU countries, where there was a seasonally adjusted fall in production of 0.6%, which itself was a sharper decline than the 0.3% drop in October.

This moderate turnaround could be a result of a slight easing of the credit squeeze imposed by many banks, with the National Bank of Romania (BNR) having reduced its key interest rates to 8% late in 2009 and making a further 0.5% cut on January 5.

Radu Gratian Ghetea, the president of the Romanian Association of Banks, believed that a further round of interest rates in lei-denominated loans could help spark a revival for the construction industry.

Romania's building sector had great potential due to the extensive infrastructure that was required, while the residential component was also significant, and would, "continue to attract investors, both local and foreign," Ghetea said in an interview with local press in late January 2010.

Although the government's VAT cut on construction work, combined with the expected improvement in the economy, is expected bolster demand for new projects in the short term, it is more likely that Romania's construction industry will build up momentum next year, when GDP is predicted to expand by a robust 5% or more.

1 comment:

richard.asquith said...

I am curious if anyone thinks there will be a VAT increase? Given the IMF bail out, and that this usual means a VAT increase (e.g. Croatia, the Baltic countries), then I thought it was on the cards? On this site www.tmf-vat.com/european-vat they seem to think it's likely.