Thursday, January 20, 2011

Romania: Year in Review 2010

Oxford Business Group

A year of tough economic decisions for Romania’s future ended with some success, as a fiscal deficit reduction plan proved effective and growth looks set to return in 2011. Energy privatisation plans continue to take shape, and national success story Dacia has laid the groundwork for continued international expansion.

Romania’s economy suffered a serious recession in 2009, with the economy contracting by 7%. Particularly hard hit was the construction sector, which had previously been a major contributor to growth, but fell 24.4% in the 12 months to the end of November, by far the most dramatic drop in Europe.

Several factors contributed to the decline in construction activity, including a sharp drop in lending as liquidity tightened and banks looked to scale back market exposure. In addition, falling consumer spending sapped demand for retail space, and the commercial property segment weakened as firms, including some foreign investors, reduced or reversed local expansion plans. The drop caused construction to slow almost to a halt, in stark contrast to the exuberance of the year before, with just 37% of housing projects started inBucharest between 2006 and 2008 completed by the end of July 2009, according to the National Institute of Statistics.

The speed of the recovery has been somewhat slowed by the government’s need to cut the deficit after several years of loose fiscal policy. In January 2010, parliament passed a budget aiming to cut the deficit to 5.9% of GDP (later revised to 6.8%) after it reached 7.3% in 2009, including measures to freeze wages and state pensions and cut public employment to meet requirements set by the IMF and EU for the resumption of payments from a $27.8bn support package.

Some relief came from a 5% value-added tax (VAT) cut on construction costs, and the National Bank of Romania’s (BNR) assiduous lowering of interest rates. However, the main story of the year was the fiscal tightening, which, by year end, had succeeded in helping cut the deficit to 6.6%, beyond the revised IMF target. Prime Minister Emil Boc’s government raised the general rate of VAT to 24% from 19% in July, while state salaries were cut by a quarter and new taxes were imposed on income from bank deposits, though a proposed 15% cut in state pensions was ruled unconstitutional. While the end of 2010 has seen some relief that Romania was able to reduce the deficit, the government suffered from a sharp drop in popularity, and Boc had to weather three confidence votes in parliament, the most recent in December. The political atmosphere remains febrile.

As uncertainty reigned over the fiscal situation and the state of the European economy, forecasts of Romania’s economic scorecard for full-year 2010 varied widely, from a contraction of 3% to meagre growth. The most recent estimate, by Romanian bank BCR in December, was of a 2.1% drop – painful, certainly, but not as drastic as it could have been, given the situation.

Given the economic travails, it is perhaps unsurprising that anticipated reforms and investments have progressed slowly. In June, the Romanian government announced that it was planning a major restructuring of the energy sector through bundling electricity utilities, part-privatising state-dominated companies and seeking local and foreign investments. The plans involved the creation of two major energy utility companies with a mix of different power stations, and opening them up to private investment. The government is also looking further to privatise gas firm Romgaz, in which it has an 85% share.

Romania has a great deal of energy potential, given its powerful nuclear plant, Cernavoda, its strategic location, experience in the sector and relatively low costs. However, some parts of the infrastructure and many facilities are not yet up to EU standards, and as much as $10.7bn of investment is needed to improve them, according official estimates – cash that the government is short of at present.

Consolidation and privatisation plans have not progressed as quickly as initial reports had suggested, and a dispute over Romgaz between the Romanian government and a private shareholder with the remaining 15% stake may be a further setback. However, on January 10, the local press reported that 15% of Romgaz and state-owned energy firms Transelectric and Transgaz will be sold off in the second half of 2011. In the medium to long term, Romania’s energy sector will need more of the expertise and capital brought by private investment, while the state would benefit considerably from the revenues generated by further privatisation.

Meanwhile, one of the country’s great success stories, automaker Dacia, goes from strength to strength. Dacia, owned by France’s Renault, is planning to boost its annual European sales by almost 50% in the next four years, it was reported in October. The increase, from 350,000 to 550,000, is the latest move in the Romanian firm’s international expansion, after several years of success in emerging markets. As part of the growth plan, Dacia will enter new markets such as the UK, where it will launch in 2012. It would also likely prove a welcome boost to Romania’s wider automotive industry, particularly component suppliers, which have flourished as Dacia, which exports 85% of its output, has grown.

After a tough 12 months of retrenchment and fiscal austerity, things are beginning to look up for Romania, with growth expected over the coming three years.

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