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Ro­ma­nia’s eco­nomic growth is ex­pected to slow down in 2014. Ex­ports should be the main growth driver. The prospects for do­mes­tic de­mand, how­ever, are not bright. The econ­omy’s per­for­mance should im­prove in the medium term. The per­for­mance of the en­ergy and trans­port sec­tors is a bot­tle­neck that must be ad­dressed by struc­tural re­forms. Labour costs have de­clined, help­ing to en­hance the com­pet­i­tive­ness. How­ever, nearly 3 mil­lion young adults – many of them highly qual­i­fied – have em­i­grated in the past decade. In 2004-2008, Ro­ma­nia's real GDP growth av­er­aged more than 6.0% per year and in­vest­ment surged fol­low­ing the coun­try's en­try in the EU. A boom in con­sumer spend­ing was driven by a rapid rise in bor­row­ing which left Ro­ma­nia highly vul­ner­a­ble when the global fi­nan­cial cri­sis hit.

The econ­omy en­tered a sharp re­ces­sion in 2009 when do­mes­tic de­mand con­tracted and cap­i­tal in­flows abruptly fell. The de­te­ri­o­ra­tion forced the gov­ern­ment to turn to the IMF and the EU for loans. A re­bound oc­curred in 2011 but the econ­omy stag­nated in 2012 when do­mes­tic de­mand slumped and ex­ports plum­meted. Un­em­ploy­ment has re­mained high, but labour market re­forms con­trib­uted to a re­cov­ery in em­ploy­ment. Growth im­proved in 2013 when ex­ter­nal de­mand picked up al­though do­mes­tic de­mand re­mained weak.

Ro­ma­nia faces a host of prob­lems. It has the low­est in­come per capita in cen­tral Europe, the weak­est en­vi­ron­men­tal stan­dards, the largest tax ar­rears, the most per­va­sive cor­rup­tion and the low­est ed­u­ca­tion spend­ing. With strong trade and fi­nan­cial sec­tor link­ages with the euro­zone, Ro­ma­nia is par­tic­u­larly vul­ner­a­ble to the re­gional eco­nomic slow­down.

Eco­nomic prospects

Real GDP growth is ex­pected to slow down from 3.5% to 2.6% in 2014. Ex­ports should be the main growth driver. The prospects for do­mes­tic de­mand, how­ever, are not bright. The econ­omy grew by 5.2% year-on-year in the last quar­ter of 2013, the fastest growth in more than two years.

Prices rose by 4.0% in 2013. Av­er­age an­nual in­fla­tion is ex­pected to be 1.6% in 2014, roughly in line with the cen­tral bank's tar­get.

In real terms, pri­vate fi­nal con­sump­tion rose by 5.9% in 2013 and gains of 5.0% are ex­pected in 2014. Tax in­creases im­posed as part of the pro­gramme of fis­cal con­sol­i­da­tion slow the re­cov­ery of con­sumer spend­ing. Credit will in­crease very lit­tle as house­holds con­tinue to re­pair their balance sheets. Some­what stronger rates of growth are fore­cast over the next sev­eral years but gains will not match those ex­pe­ri­enced prior to the re­ces­sion.

Un­em­ploy­ment was 7.3% in 2013 and is ex­pected to edge down to 7.2% in 2014. Labour costs have de­clined, help­ing to en­hance the com­pet­i­tive­ness of the econ­omy. How­ever, ac­cord­ing to the Na­tional In­sti­tute of Sta­tis­tics, nearly 3.0 mil­lion young adults – many of them highly qual­i­fied – have em­i­grated in the past decade. To tackle the prob­lem Ro­ma­nia's gov­ern­ment has in­tro­duced a se­ries of mea­sures to at­tract young émi­grés home. These mea­sures in­clude grants worth up to 100,000 euro to set up a new busi­ness and sub­si­dies to lower mort­gage costs for first­time home buy­ers.

A sig­nif­i­cant por­tion of the FDI goes to lowskill in­dus­tries such as tex­tiles and leather goods. An­other 15-20% of FDI has found its way into re­tail and whole­sale oper­a­tions. Ro­ma­nia needs to at­tract more green-field in­vest­ments in ex­port-ori­ented man­u­fac­tur­ing and ser­vices that de­mand higher skills.

Eval­u­a­tion of market po­ten­tial

Eco­nomic growth rate should ac­cel­er­ate in the medium term with real GDP grow­ing by

up to 3.7% per year. Do­mes­tic de­mand should grad­u­ally pro­vide more sup­port with em­ploy­ment and in­vest­ment also ex­pected to strengthen. Some help will come from the 30 bil­lion euro fund the EU has set aside to mod­ernise Ro­ma­nia. How­ever, the coun­try's abil­ity to ab­sorb EU funds is still ques­tion­able.

The coun­try's mon­e­tary and fis­cal con­straints should ease as the econ­omy im­proves. The do­mes­tic market is still im­ma­ture and has con­sid­er­able po­ten­tial to grow. Con­ver­gence to the EU liv­ing stan­dards will de­pend on in­creased in­vest­ment and greater em­ploy­ment cre­ation. More progress in struc­tural re­form is needed to pre­pare for even­tual euro adop­tion.

In the longer term, the abil­ity to achieve sus­tain­able rates of growth will re­quire the gov­ern­ment to clear its ar­rears, im­prove the qual­ity of spend­ing and boost tax col­lec­tions. Per­for­mance of the en­ergy and trans­port sec­tors is a bot­tle­neck that must be ad­dressed by struc­tural re­forms. The en­ergy sec­tor is dom­i­nated by state-owned en­ter­prises.

For­eign trade

Ro­ma­nian ex­porters are heav­ily de­pen­dent on EU mar­kets. The EU's share of Ro­ma­nian ex­ports amounted to 71.5% in 2013. Ex­ports rose by 13.7% (in U.S. dol­lar terms) in 2013 and gains of 10.8% are ex­pected in 2014.

Ro­ma­nia's ex­ter­nal sec­tor is also heav­ily de­pen­dent on man­u­fac­tur­ing with ma­chin­ery and trans­port equip­ment ac­count­ing for the high­est share of the coun­try's ex­ports – 42.0% in 2013.

The share of ex­ports in GDP has been ris­ing for sev­eral years and amounted to 34.7% in 2013, up from 24.3% in 2008. The cur­rent ac­count deficit was 1.1% of GDP in 2013 and it will widen to 2.2% in 2014.

Busi­ness en­vi­ron­ment

The pri­vati­sa­tion pro­gramme has fallen be­hind sched­ule but will ac­cel­er­ate in the fu­ture. Al­to­gether, ten state-owned com­pa­nies are sched­uled for liq­ui­da­tion or pri­vati­sa­tion. Ro­ma­nia has one of the largest in­for­mal economies in the EU – es­ti­mated at more than 30% of GDP. The gov­ern­ment has taken sev­eral steps in­clud­ing an in­crease in penal­ties levied on em­ploy­ers for un­reg­is­tered em­ploy­ees and more rig­or­ous in­spec­tions to scale back the in­for­mal econ­omy. A flat tax (16%) on per­sonal in­come and prof­its is also in­tended to draw much of the coun­try's size­able in­for­mal econ­omy into the open.

At the be­gin­ning of 2014, Ro­ma­nia was obliged to open up its land market to for­eign in­vestors. This was one of the re­quire­ments of EU mem­ber­ship, but the coun­try was given sev­eral years to pre­pare.

The full dereg­u­la­tion of prices for com­mer­cial users of elec­tric­ity and gas was car­ried out in 2013. There has been progress in im­ple­ment­ing struc­tural re­forms but more ef­forts are needed in the case of the en­ergy and trans­port sec­tors. A com­pre­hen­sive re­form of the health­care sys­tem is un­der prepa­ra­tion to make the sys­tem fi­nan­cially sus­tain­able.

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