Monday, February 7, 2011

Romania: belt and bracesy

ft.com
February 7, 2011
by Chris Bryant

They may not be surprised but investors will certainly feel a degree of relief that Romania has decided to seek a new €5bn precautionary loan with the International Monetary Fund and European Union.

Perhaps wisely, Bucharest has chosen not to follow the example of neighbouring Hungary which decided last summer that it could do without the advice of this roving band of fiscal policy wonks.

Romania hopes of course never to need the funds, which are there as a backstop and a tacit promise to investors that the country is not about to throw out the hard labours of fiscal consolidation with the post-recession bathwaters.

After a cut in public sector wages by 25 per cent in 2010, a 15 per cent reduction in welfare benefits and a 5 percentage point increase in VAT, Romania has convinced most market participants that it is serious about balancing the books.

Many Romanians have yet to be convinced, however, that the pain these measures caused will be worth it in the long term.

The EBRD’s forecast of a 1.1 per cent increase in Romanian GDP in 2011 will barely make a dent in the total economic contraction suffered by the country since the onset of the crisis (A 7.1 per cent decline in GDP 2009 was followed by an approximately 2 per cent drop last year).

Furthermore, the increase in economic output this year is likely to well below the south-east European average of 1.9 per cent growth, not to mention the 3.2 per cent average of central European and the Baltic states (countries with which proud Romania would rather compare itself).

So, whither growth?

Sadly, Romania has no magic wand to wave and few policy tools at its disposal to stimulate growth but there are some low-hanging fruit that might easily be dislodged.

The IMF has repeatedly reminded Romania that getting government arrears permanently under control would provide a dramatic boost to long-suffering Romanian SMEs who sometimes wait months to get paid.

Tapping the €19bn pot of EU structural funds that could help co-finance infrastructure and other worthy projects would also certainly help matters.

Romania’s inability to spend this money (for a variety of rather dull reasons) has been a source of frustration in the past, so too its inability to build decent roads. (Eurostat found last year that Romania had the lowest motorway density in Europe at 2km per 1000 square kms)

But the government claims that absorbing EU funds is now a key priority. Meanwhile investment in infrastructure may also be on the verge of picking up.

Earlier this month, for example, Austrian building behemoth Strabag signed a total of €106m in contracts to upgrade two national roads, with the work set to begin in April.

There are also signs of life in the energy sector. Last month’s listing of Fondul Proprietatea, a property restitution fund consting mainly of holdings in Romanian energy companies has raised the profile of the industry among foreign investors. A spate of energy-related privatizations due later this year could stimulate still further curiosity.

Nor should we forget that European utilities are currently falling over themselves to build wind parks along Romania’s Black Sea coast, which has among the most reliable gusts in Europe.

According to the Europea Wind Energy Association, Romania ranked sixth among EU member states for installed new wind turbine capacity in 2010 and first among new member states.

So as Romania swaps its €20bn IMF facility for a €5bn backstop, there are perhaps grounds for cautious optimism. Romanians will feel that the winds of good fortune are long-overdue.

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