Doing Business In: Romania

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Key facts about Romania

  • Population: 19,328,838 (as of 1st of January 2020, according to the Romanian National Institute of Statistics)
  • Size: 238,397 square kilometers, approximatively the same size as the United Kingdom, place in Europe by size: 12;
  • Geographic location: South East Europe, bordering the Black Sea
  • Official language: Romanian (a latin/romance language, such as French, Spanish, Italian or Portuguese)
  • Capital: Bucharest, having 2,155,240 inhabitants (as of 1st of July 2020, according to the Romanian National Institute of Statistics)
  • Main seaports: Constanța, Mangalia
  • Currency: lei (RON). Romania however undertook the obligation to adopt the euro once the nominal, legal and real convergence criteria are fulfilled. At the moment, Romania is committed to joining the euro area, targeting the year 2024.
  • Regime: Semi-presidential republic
  • EU Membership: EU member state since 2007
  • NATO Membership: NATO member since 2004
  • Legal system: Civil law system

Introduction

Back in 2021, we were all thinking that the world is in a volatile, uncertain, complex and ambiguous state and that there is nothing else that could surprise us. It seems however that reality tends to be a better source for fiction novels than imagination itself.

Romania is no stranger to ambiguity and uncertainty, of course. Situated at the junction of deep geopolitical divides, one is almost certain to fail in making any successful predictions about Romania’s immediate future, other than the simple, evergreen, prediction: it will be something we did not (fully) anticipate.

Now Romania is facing yet another crisis, so unexpected and yet so usual and almost predictable for this part of the world. For business, it is time again to look carefully at risks, opportunities and plan for a rough but possibly very lucrative next decade. We see great things ahead for those cunning enough to seize the day.

The Romanian economy – a very quick guide

Following the end of the communist rule in 1989, Romania’s businesses have continued to grow year by year. Most recently, the turnovers of the country’s most important companies are considered to be double than those registered 10 years ago[1]. The capital city, Bucharest, draws the majority of business interest, and generates almost 38% of the total turnover in the Romanian economy. If we also count the economies along the Bucharest-Brașov route (therefore including Bucharest and Ilfov, Prahova, Brașov counties) together they amount for more than 50% of business in Romania.

According to the European Economic Forecast[2], in 2021, Romania’s economy is expected to have grown by 6.3 percent, mainly driven by strong domestic demand. As for 2022, latest readings of sentiment indicators point to a rather positive, albeit moderate, growth outlook, in particular in services, retail trade, construction and industry. Private consumption is expected to pick up in the second half of 2022 and investment is expected to remain strong, supported by the Recovery and Resilience Facility and other EU Funds, but the expected increase in private investments is projected to dampen private investments[3].

Companies’ performance in the (hopefully) last year of the pandemic

The easing of COVID-19 containment measures in the first quarters of 2021 and the companies’ experience of the previous pandemic year resulted in an increase in profits for companies active in the business services, trade, construction, real estate, manufacturing and utilities sector. Conversely, mobility restrictions brought by the Delta variant of the SARS-COV-2 virus and the decrease in aggregate demand dealt a heavy blow to services to households, mining and quarrying, while agricultural output contracted due to the weather conditions which had a negative impact on the sectors profitability[4].

The lessons of the previous global crisis seem to be looming on us as we also see a surge in the number of insolvency cases. According to the data published by the Romanian Trade Registry, the number of insolvencies has risen by 7.9 percent in 2021 compared to 2020. Hence, as the moratorium and the relaxed conditions under the insolvency legislation promoted by the Romanian government are being lifted, the postponed effects of the pandemic may now start to show.

The need for reform in the Romanian restructuring sector is now greater than ever. The issuance of legislation that would create an efficient restructuring framework is one of the measures that might prevent the occurrence in many companies of a serious state of degradation, which may cause the closing or bankruptcy thereof. As Romania is bound to transpose into national legislation the EU legislation on preventive restructuring frameworks, the Romanian legislator is now having a major opportunity to implement a wide range of legislative reforms in order to improve the options available to debtors in financial difficulty.

Romanian labour market in the past year

The pandemic has left its mark on the Romanian labour market as well, with the unemployment rate fluctuating in line with the emergence of each new wave. Against the backdrop of the easing of restrictions, the unemployment rate fell to almost 5 percent in September 2021, but was followed by a new spike in the last quarter of the year as a result of the forth wave triggered by the Omicron variant and the population’s low vaccination rate.

The Romanian labour market was nevertheless greatly supported by the authorities’ financial support for workforce retention. In early 2021, furlough schemes were reintroduced until the end of the year for the economic agents directly hit by the restrictions. Romania also benefits from EUR 4.1 billion under the EU’s programme for Support to mitigate Unemployment Ricks in an Emergency (SURE)[5].

A new challenge

The latest Inflation Report published by the National Bank of Romania in February 2022 has confirmed that the global inflation fueled by marked rises in energy, food and other non-energy commodity prices is also a reality Romania cannot escape.

The annual CPI inflation rate in Romania has stepped up significantly in the last quarter of 2021, reaching a 10-year high of 8.19 percent in December 2021. As the public health risks have persisted and the energy market strains have gained renewed momentum due to the conflictual situation in Ukraine, forecasts are not so positive either. The National Bank of Romania forecasts shows a higher annual CPI inflation rate in April, ahead of a gradual deceleration over the next quarters, when lower adjustments in energy prices are envisaged.

The National Bank of Romania has also been constantly increasing the monetary policy rate and decided to maintain firm control over money market liquidity. The current monetary policy rate is of 3 percent per annum (increased as of 6 April 2022 from a previous rate of 2.5 percent)[6].

Analysts[7] also have lowered their estimate for 2022’s economic growth to 3 percent, down half a percentage point from the previous forecast, while their inflationary expectations have continued to rise (a inflation rate for 2022 is seen at 8.03 percent currently) amid the invasion in Ukraine. As regards the euro to lei exchange rate, a depreciation of the national currency is also expected in the next 12 months, while the key interest rate established by the National Bank of Romania is anticipated to surge to at least 4.25 percent in the next 12 months.

Piece authored by Valentin Voinescu, Partner, Banking & Finance


[1] According to an analysis by the consulting company Frames.

[2] https://ec.europa.eu/info/sites/default/files/economy-finance/ip169_en.pdf

[3] Idem.

[4] Financial Stability Report of the National Bank of Romania, published in December 2021

[5] Financial Stability Report of the National Bank of Romania, published in December 2021

[6] https://www.bnr.ro/Monetary-Policy–3318-Mobile.aspx

[7] CFA Romania’s Macroeconomic Confidence Indicator survey