PEST Analysis of Romania

PEST Analysis of Romania
September, 2008
PEST Analysis of Romania Page 1 of 15
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Table of Contents
Political Factors ......................................................................................................................................... 3
Historical preview .................................................................................................................................. 3
RulingParty ............................................................................................................................................ 3
Latest EU Report ................................................................................................................................... 3
Foreign Relations .................................................................................................................................. 4
Foreign Investors Incentives................................................................................................................. 4
Trade Partners ....................................................................................................................................... 5
Economics Factors ................................................................................................................................... 5
Economic Growth .................................................................................................................................. 5
Inflation ................................................................................................................................................... 6
Current Account Balance ...................................................................................................................... 7
Interest Rates ........................................................................................................................................ 7
FDI .......................................................................................................................................................... 8
Employment Growth, Income and Wages ........................................................................................... 9
Economic Ratings ............................................................................................................................... 11
Banking System................................................................................................................................... 11
Social Factors .......................................................................................................................................... 12
Demographics ..................................................................................................................................... 12
Households .......................................................................................................................................... 13
Technological Factors............................................................................................................................. 14
IT Sector............................................................................................................................................... 14
Research & Development ................................................................................................................... 14
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Political Factors
Romania is an independent parliamentary republic with judicial, executive and legislative branches of
government. The president serves as Romania’s chief of state. The Prime Minister serves as the
head of the government and is appointed by the president with the consent of the Parliament. The
seat of the government is in the capital of the country – Bucharest.1 2
According to the reputable Ducroire/Delcredere agency for risk assessment, Romania has low
political risk.3
Historical preview
In Romania, the fall of the communist regime was marked by the execution of the emblematic leader
of the communist party Nicolae Ceausescu on the Christmas Day of 1989. Ion Iliescu, a former
communist, took over the power in the country and was elected as a president. It was not until 1996
when the communist era ended in reality in the country and a centre-right government came into
power. However, the new leaders - Emil Constantinescu as a president and Victor Ciorbea as a prime
minister, failed to implement their economic reforms which led to the re-election of Ion Iliescu in 2000.
Another failure of a successful execution of key economic and social reforms meant that the country
was not put on the list of the countries to join the EU in 2004. In March 2004, at the end of Iliescu’s
mandate, Romania was admitted to NATO. Despite all the hardships, in April 2005 Bucharest signed
the European Union accession treaty and since January 2007 the country has been an official
member of the EU. 4 5
Ruling Party
The Romanian political life can be best characterized as unstable. The high-level of division between
the political parties often results in unsteady coalition governments that spend most of their ruling
time and energy trying to ensure their own survival. The current centre-right ruling government is not
an exception. Justice and Truth Alliance is a coalition between the National Liberal Party (PNL) of
Prime Minister Tariceanu, the Democratic Party (PD) of President Basescu and two smaller parties –
the Conservative Party (CP) and the Hungarian Democratic Union in Romania (UDMR). In April 2007,
Basescu’s PD party was excluded from the coalition, which made the new government a minority
one, made up of the PNL and the Hungarian Democratic Union. The main opposition of the current
government is the party of the Social Democrats.6 The expectations for the upcoming general
elections in 2008 are for a bitter campaign, which is likely to end with the formation of a new alliance
between the leading parties.7
Latest EU Report
On July 23, 2008 the European Commission issued its second post-accession annual report on
Bulgaria and Romania on the subject of judicial and anti-corruption reforms.8 According to the report,
Romania has largely achieved improvements on the matter and thus, only received a warning relating
to particular areas. No decisive measures such as the activation of the safeguard clause or retention
1 http://romania.suite101.com/article.cfm/romania_government_profile
2 http://news.bbc.co.uk/2/hi/europe/country_profiles/1057466.stm
3 http://www.fita.org/countries/romania.html
4 http://news.bbc.co.uk/2/hi/europe/country_profiles/1057466.stm
5 http://news.bbc.co.uk/2/hi/europe/country_profiles/1058027.stm
6 http://www.edc.ca/english/docs/gromania_e.pdf
7 http://www.businessmonitor.com/businessforecasts/romania.html
8 http://www.oxan.com/display.aspx?ItemID=DB144215
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of European funds were enforced, while Bulgaria suffered a harsh penalty of around EUR 500
million.9
The overall conclusion of the report is that Romania’s performance represents a “mixed picture”.
Despite the fact that some progress is acknowledged, the predominant tone of the document is
negative.10 According to the EU specialists, the two major problems are corruption and the still fragile
legal and institutional framework.1112 The report recommends that Romania significantly enhances the
combat against high-level corruption, focusing on case delays due to minor excuses. Specific cases
are pointed out in the document and the parliament is harshly condemned for delaying corruption
inquiries involving the former Prime Minister Adrian Nastase and other top officials.13
Victor Alistar, Executive Director of Transparency International Romania, says that new anti-
corruption reform must be designed on a purely technical basis and backed by strong political will in
order for Romania to fulfill all the benchmarks set at the time of accession.14
Foreign Relations
Since the fall of communist regime in 1989, Romania has pursued a policy of strengthening its
relations with the other European countries and the United States.
Romania is a member of more than 60 international and regional organizations. It joined the
International Monetary Fund and the World Bank in 1972. The country is part of the European Union
since January 1, 2007 and an active member in the North Atlantic Treaty Organization (NATO) since
2004. World Trade Organisations (WTO), United Nations (UN), World Health Organization (WHO)
and UNESCO are other international organizations in which Romania is a member.
Romania is an active member in regional organizations as well. The country is part of the Southeast
Europe Cooperation Initiative (SECI) and the Stability Pact for Southeast Europe. Romania also is a
founding member of the Black Sea Consortium for Economic Development and has been a positive
force in supporting stability and cooperation in the area
Furthermore, Romania has good relations with the Middle East, Israel in particular. The Balkan
country was an active participant in the negotiations after the Gulf conflict in 1991.15
Foreign Investors Incentives
Since the fall of the communist regime, Romania has been gradually liberalizing its trade regulations
and incentives and now follows the guidelines set by the EU. The ruling government is constantly
updating the laws and financial conditions for doing business in Romania in order to maintain the
positive growth of the economy. On June 27, 2008 the Romanian Government approved the latest
investment law, the aim of which is to provide an umbrella framework in which processes of
application and allocation of state aids will be made more consistent and transparent.16
Other business incentives that the country offers are no limits of foreign participation in commercial
companies (a foreign investor may establish a 100% owned enterprise in Romania), full repatriation
of capital and profits, and equal treatment of residents and non-residents investors.17
9 http://www.state.gov/r/pa/ei/bgn/3211.htm
10 http://www.state.gov/r/pa/ei/bgn/3211.htm
11 http://kosmopolit.wordpress.com/2008/07/23/latest-monitoring-report-on-romania-definitely-not-the-last/
12 http://the8thcircle.com/2008/07/23/eu-report-on-romania-and-bulgaria/
13 http://www.balkaninsight.com/en/main/news/12024/
14 http://kosmopolit.wordpress.com/2008/07/23/latest-monitoring-report-on-romania-definitely-not-the-last/
15 http://www.state.gov/r/pa/ei/bgn/35722.htm
16 http://www.romanianewswatch.com/2008/07/romania-boosting-investor-confidence.html
17 http://www.riooilandgas2008.com/economy%20highlights.htm
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The corporate income tax rate and personal income tax rate for 2008 are flat at 16%. The standard
VAT rate is 19% .There is also a reduced VAT rate of 9%.18
Trade Partners
The two main trade partners of Romania, in both import and export terms, are Italy and Germany.
Imports from the EU weight 70% of overall imports. The value of imports in the first three months of
2008 reached 12.9 billion euros, an increase of 12% compared to the same quarter of 2007. The top
five partner countries are Germany (16.8%), Italy (11.6%), Hungary (6.7%), Russia (6.4%) and
France (6.3%).
The value of exports in the first three months of 2008 got close to EUR 8 billion, an increase of 14
compared to the first quarter of 2007. Exports to the EU weight 71% of overall exports. The top five
partner countries are Germany (16.5%), Italy (16.3%), Turkey (7.9%), France (7.7%) and Hungary
(5.3%).19
Economics Factors
Economic Growth
Driven by the EU accession, Romania has shown a strong and stable economic growth. The country
has managed to overcome the building up of economic tensions in the second part of 200720 and in
the first quarter of 2008 recorded one of its highest GDP growth rates since 1989. The economy
advanced by 8.2% reaching EUR 24.5 billion21, exceeding even the most optimistic forecasts.
According to Lucian Anghel, chief economist of Banka Commerciala Romana (BCR), the unexpected
GDP growth is the result of a strong base effect in terms of tax collection and generation of electrical
power.22
Ion Ghizdeanu, the chairman of the National Forecast Commission, revealed that because of the
outstanding economic growth, the GDP figure for the whole of 2008 could be higher than previously
estimated.23
The sectors with the highest contribution to the GDP are industry (36.7%), services (37.7%) and
agriculture (8.6%).24
Total GDP for 2007 was estimated to be EUR 115 519 billion.25 According to the International
Monetary Fund (IMF), GDP per capita for 2008 is estimated to be EUR 7 868, which is still only about
37 % of the euro area's level.26 27
18 http://www.worldwide-tax.com/romania/romania_tax_news.asp
19 http://www.zf.ro/articol_178693/romania_s_trade_deficit_expected_to_stabilise.html
20 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
21 http://www.insse.ro/cms/rw/pages/index.en.do
22 http://www.economist.com/countries/Romania/profile.cfm?folder=Profile-Forecast
23 http://www.romaniareport.com/investinromania.xml
24 http://www.insse.ro/cms/rw/pages/index.en.do
25 http://www.insse.ro/cms/files/statistici/comunicate/pib/pib_trimIV_e07.pdf
26 http://www.imf.org/external/pubs/ft/weo/2008/01/weodata/weorept.aspx?sy=2006&ey=2013&scsm=1&ssd=1&sort=country&ds=.&br=1&c=968&
s=NGDP_RPCH%2CNGDPD%2CNGDPDPC%2CPPPGDP%2CPPPPC%2CPCPIPCH&grp=0&a=&pr1.x=87&pr1.y=12
27 http://www.imf.org/external/np/ms/2008/042108.htm
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9,0%
8,0%
6,5%
7,0%
7,9%
6,0%
5,0%
6,0%
6,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
T)
T)
T)
06
07
S
S
20
20
08(E
09(ES
10(E
20
20
20
Graph 1. GDP of Romania – real change in % against previous year (2006-2010)28 29
Inflation
The current increase in inflation is mainly a consequence of the supply shocks of food and energy
which Romania experienced last year. In 2007, drought destroyed one-third of Romania’s agricultural
yield, which triggered an increase in food prices. As a result, the inflation rate rose from 3.7% in May
2007 to 8.6% in April 2008.30 As a natural consequence, food experienced the largest price increase
of 9.14% in 2007.31More worrying for the country in the long-term is the fact that the booming
domestic demand is increasingly running up against the capacity of Romania, particularly the tight
labor market and the underdeveloped public infrastructure. Private-sector wage growth is outpacing
productivity growth, which has direct impact on the increasing inflation. This fact is confirmed by the
recent surge in Producer Price Index (PPI) inflation, driven from the higher unit labor costs associated
with doing business in the country.
9,0%
8,0%
8,0%
6,6%
6,6%
7,0%
7,0%
6,0%
5,0%
5,0%
4,0%
3,0%
2,0%
1,0%
0,0%
)
)
)
T
T
T
S
S
S
2006
2007
2008(E
2009(E
2010(E
Graph 2. Consumer Prices in Romania – change in % against previous year (2006-2010)32
While the macroeconomic outlook is likely to remain stable, additional fiscal policy contraction may
well be needed to keep inflation into the end-2009 target range. 33
28 http://www.wiiw.ac.at/pdf/FC2_presse_eng.pdf
29 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
30 http://www.seeurope.net/?q=node/16089
31 http://www.monstersandcritics.com/news/business/news/article_1386044.php
32 http://www.wiiw.ac.at/pdf/FC2_presse_eng.pdf
33 http://www.imf.org/external/np/ms/2008/042108.htm
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Current Account Balance
Capital inflows have nourished a constantly increasing domestic spending boom. Although current
account deficits are normal during the phase at which the Romanian economy is going through,
Romania’s gap is above what could be considered a “normal” level and raises concern over medium-
to long-term sustainability.34 In case of recession on the global markets, foreign investors may
suddenly draw their investments out of Romania, which can cause a huge collapse in the country’s
economy. 35
After the increase with over three percentage points in 2007, the current account deficit reached the
worrying 14% of GDP. Due to the larger growth of exports in comparison to imports in the first quarter
of 2008, with more than 1% year-on-year basis, the gap shows signs of stabilization. After the latest
ratification of the budget, the targeted deficit was lowered from 2¾ percent of GDP to 2¼ percent of
GDP. Despite the right direction of economic policy, the IMF recommends even lower target of 1¾
percent of GDP.36 37
According to the IMF, the huge account deficit has been created by investments mainly in the industry
sector, which will certainly boost the productive capacity and will have positive effect on the exports in
the middle-term. 38
0,0%
-2,0%
-4,0%
-6,0%
-8,0%
-10,4%
-10,0%
-13,0%
-12,0%
-14,6%
-14,0%
-14,0%
-14,3%
-16,0%
06
07
ST)
T)
20
20
E
ES
08(
10(
20
2009(EST)
20
Graph 3. Current Account Deficit of Romania in % of GDP (2006-2010)39
Interest Rates
In accordance with Albert Jaeger’s advice, IMF’s Romania Mission Head, the RCB continues to raise
the interest rate in the country in order to manage a tighter monetary policy .40 On the last day of July,
Romania’s Central Bank set a new interest rate of 10.25% (a hike of 0.25%), which marked the
highest interest rate in the EU. This was the seventh consecutive time for 2008 in which the central
bank corrected the interest rate in order to prevent a boom in the private borrowings, which registered
a rise of 63.4% in June.41 42
34 http://rbd.doingbusiness.ro/en/general-economic-trends/3/romania-economic-outlook-expect-the-unexpected.html#46
35 http://www.businessmonitor.com/businessforecasts/romania.html
36 http://www.imf.org/external/np/ms/2008/042108.htm
37 http://rbd.doingbusiness.ro/en/general-economic-trends/3/romania-economic-outlook-expect-the-unexpected.html#46
38 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
39 http://www.wiiw.ac.at/pdf/FC2_presse_eng.pdf
40 http://www.romanianewswatch.com/2008/04/imf-says-romania-may-need-more-action.html
41 http://balkaninsight.com/en/main/news/12182/
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This policy, despite being in harmony with IMF’s recommendations, is not supported by the Romanian
Banker’ Association. The latter warned that higher interest rates and further restriction on private
borrowing are among the key components which could lead to a crisis in Romania’s real estate
market. The market has already started to experience the influence of the tight monetary policy by
recording a drop by half of the sales of new apartments in the first six months of the year, compared
to the monthly average in 2007. 43
FDI
Over the past few years, Romania has experienced a steady increase in FDI flows. The quality of the
business environment has improved significantly and in 2007 Romania progressed from 55th to 48th
place in the World Bank's Doing Business report, ranked higher than other countries in the region
such as Hungary, the Czech Republic and Poland.44 In addition, Romania emerged as the leading
Eastern/Central European economy in attracting FDI with 150 projects taking it to sixth position in the
The Ernst & Young European Investment Monitor (EIM) league table.45
As a relatively new member of the EU, Romania shows a strong integration into the European
economic life. More than 80% of the total invested capital in 2007, which amounted to EUR 7 076
million, came from European countries.46 47 48
Figure 1. Percentage of foreign currency invested capital in companies as of 31 December
49
2007
Stable FDI inflows have been concentrated in export-oriented industries, such as machinery and
equipment, textiles and footwear, metals and metal products, minerals and fuels, which shows strong
interest and profitability in Romania’s export-oriented industries and suggests that potential for future
real economic growth is present.50 51 52
42 http://www.rttnews.com/Content/USEconomicNews.aspx?Node=B2&Id=670441
43 http://balkaninsight.com/en/main/life_and_style/12168/
44 http://ec.europa.eu/economy_finance/publications/publication11881_en.pdf
45 http://www.eyeim.com/pdf/EIM%202008%20Report%20final.pdf
46 http://www.onrc.ro/statistici/is_may_2008.pdf
47 http://mpra.ub.uni-muenchen.de/7280/1/MPRA_paper_7280.pdf
48 http://arisinvest.ro/en/why-romania/fdi-statistics/
49 http://www.onrc.ro/statistici/is_may_2008.pdf
50 https://www.cia.gov/library/publications/the-world-factbook/geos/ro.html
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Some of the top foreign investors in the country are METRO, Ford, Carrefour, Nokia, OMV, Erste
Bank, Gaz de France, Bamesa Otel, Arcelormittal Galati, Vodafone, ENEL.53 54
According to the Financial Minister Varujan Vosganian, FDI for 2008 may exceed the ‘‘psychological
threshold'' of EUR 10 billion due to the recorded EUR 4,2 billion in the first five months of the year.55
Gilbert Wood, the president of the Foreign Investors Council (FIC), adopts the widespread optimistic
view on the current business environment in Romania. Nevertheless, he thinks that Romania needs
to improve the flexibility of its labor market, to level the playing field for all businesses, to uniform the
enforcement of the existing legislation, and to clarify its tax laws in order to unleash the country’s full
potential.56
10 000
12 000
9 059
10 000
7 076
8 000
5 213
6 000
€
4 000
2 000
0
)
T
S
2005
2006
2007
2008(E
Figure 2. FDI in Romania (EUR million) (2005-2008)57
Employment Growth, Income and Wages
The Romanian labor market can be best described as tight. The strong economic growth combined
with the labor force emigration is among the main reasons for the 6.4% unemployment rate recorded
in 2007. The positive trend continued in 2008, as the favorable conditions boosted seasonal hiring
and the unemployment rate fell to 3.9% in April.58 In comparison to other middle-sized or large
European countries such as Poland and Spain, this figure is very low.59
51 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
52 http://www.ambbukarest.um.dk/da/menu/Eksportraadgivning/Markedsmuligheder/SidsteNyt/ForeignDirectInvestmentInRomania.htm
53 http://www.roconsulboston.com/Pages/InfoPages/Businesspages/RetailOct07.html
54 http://arisinvest.ro/en/why-romania/top-foreign-companies-in-romania/
55 http://www.silobreaker.com/DocumentReader.aspx?Item=5_885278727
56 http://www.roconsulboston.com/Pages/InfoPages/Businesspages/InvestClimate.html
57 http://www.wiiw.ac.at/pdf/FC2_presse_eng.pdf
58 http://seeurope.net/?q=node/16183
59 http://www.answers.com/topic/romania
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Graph 4. Gradual tightening of the labor market60
By economic sector, 29.5 % of the total employed population worked in agriculture, 31.4 % in industry
and constructions, and 39.1 % in services.61 62
8,0%
7,3%
6,4%
7,0%
6,0%
5,0%
5,7%
5,5%
5,5%
4,0%
3,0%
2,0%
1,0%
0,0%
ST)
2006
2007
(EST)
(EST)
08
09
10(E
20
20
20
Graph 5. Unemployment in Romania (2006-2010)63 64
According to ING Bank Romania, wage growth is to remain stable throughout 2008. The experts of
the bank expect nominal net wage economy-wide to increase by near 20% year on year, which is a
little bit lower than the 22% in 2007.65 Latest data reveals more optimistic results and shows that for
April 2008 the increase in the wage is 25% year on year. The official data from National Statistical
Institute show that the average monthly wage is EUR 354. The highest wages of EUR 1 030 is
received by bank employees, while wood processing workers get only EUR 193.66
Despite the increase in the earnings of the Romanian citizens, unions have protested since the
beginning of the year. They demand an increase of the minimum wage, which now stands at EUR
143, to EUR 171 from September 2008. However, the Minister of the Economy, Varujan Vosganian,
60 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
61 http://www.insse.ro/cms/files/pdf/en/cp3.pdf
62 http://seeurope.net/?q=node/16183
63 http://www.imf.org/external/pubs/ft/scr/2008/cr08208.pdf
64 http://www.wiiw.ac.at/pdf/FC2_presse_eng.pdf
65 http://rbd.doingbusiness.ro/en/general-economic-trends/4/romania-economic-outlook-expect-the-unexpected.html#80
66 http://www.monstersandcritics.com/news/business/news/article_1409245.php/Romanian_wages_jump_by_25_per_cent
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