Romania sees fast growth but slow reform

Romania is cementing its position as a major FDI hotspot in eastern Europe, with its appeal as a low-cost manufacturing base being augmented by a growing domestic market of 19 million people – the largest in Eastern Europe. In 2017, Romania was notably the fastest growing economy in the EU, and the second largest recipient of foreign investment after the Czech Republic and Poland, according to figures from Unctad.

The country’s long established industrial sector has typically attracted the lion’s share of FDI. However, more recently, Romania’s young, tech-savvy workers have contributed to the development of the IT and services sectors, which are now major recipients of foreign investment.

Despite these opportunities, Romania still faces hurdles to achieving its potential. Persistent issues surrounding governance, the regulatory environment and infrastructure are frequently criticised and are yet to be fully addressed by the local authorities. 

An EU star

Still, the country is attracting outside interest. Florin Vasilica, transaction advisory services leader at EY Romania, says: “In the past three to four years, we have seen a strong increase in the people’s purchasing power – initially driven by growth, but lately also by a fiscal stimulus by the government – and that has translated into growth in retail and consumption and, in turn, in strong interest from foreign investors in anything related to consumer goods.

“That has been a major investment driver, with a lot of [foreign] companies looking to develop new projects in the country or buy local companies.” 

Romania stood out in the EU in 2017, with a 7% GDP growth rate boosted by consumption, ongoing fiscal stimulus and growing minimum wages, as the IMF highlighted in its latest Article IV mission to Romania in March 2018. Solid macroeconomic growth gave new impetus to foreign investment, which climbed to $5.2bn in 2017, a slight increase from the $5bn recorded a year earlier, according to headline FDI figures tracked by Unctad.

Major investors in the retail or wholesale sectors strengthened their local capacity to stay on top of the domestic market growth. German cash-and-carry group Metro invested $13.4m in May 2018 to expand its local operations. Its German peer Penny Market also invested $20.23m a year earlier to ramp up its local operations. 

Tech talent

Beyond a growing domestic market, Romania remains a major hub for low-cost manufacturing and services in the EU. It has the second lowest cost of labour among the 28 members, after Bulgaria, with hourly labour costs estimated at about €5, according to figures from Eurostat. This has been a major reason behind the impressive FDI figures in the manufacturing and ICT sectors. 

“Its young people are the most valuable asset Romania has, and it’s quite underpriced frankly, which is why tech companies can come in and do very well in Romania,” says Mark Gitenstein, a former US ambassador to Romania and senior counsel at law firm Mayer Brown.  

About 110,000 people are already working in the Romanian ICT sector, which makes the country the largest such employer in central and eastern Europe, followed by Poland (100,000 employees) and Ukraine (90,000), according to 2017 figures by tech recruitment company Brainspotting.

The sector currently generates about 6% of national GDP, a percentage expected to double by 2025, according to local estimates. Major foreign investors are fuelling the development of the industry, with companies including Oracle, IBM and Ericsson taking a lead with their shared services centres in the capital Bucharest, as well as in cities such as Timișoara, Iași, Sibiu and Craiova. Local start-ups and SMEs have also sprung up in recent years, with robotic process automation software provider UiPath becoming the country’s first ‘unicorn’ (a startup valued at more than $1bn). 

Upgrading manufacturing

Despite being surrounded by the emerging industrial powerhouses of Poland or Hungary, Romania is also faring well in traditional manufacturing. Manufacturing accounted for one-third of overall stock of FDI into the country as of the end of 2016, by far the largest single recipient sector of foreign capital, according to figures from the Romanian central bank. Manufacturers across the board are now upgrading local operations to embrace the opportunities of advanced manufacturing. Among others, goods producer Artic has received the backing of the European Investment Bank (EIB) in the form of a $68m credit line for the construction of a large-scale washing machine production plant featuring advanced manufacturing technologies and automation efficiency. 

“So even as the costs of production have risen, which is undoubtedly good for the employees, so has the quality and the value added,” says Paula Pîrvănescu, secretary of state for investment promotion in Romania. “Today, we see that investors who used to manufacture products now expand also into R&D. At the same time, investors who started manufacturing [at a] low complexity are now tackling top-notch technologies, as they discover that the workforce is able to develop and deliver a very high level of performance.

“Stimulating the IT and R&D sectors through tax exemption for the employees represents a much-awaited measure that will definitely trigger further investments into these sectors.”

However, with unemployment at historic lows at below 5% and young Romanians leaving in scores to find better opportunities abroad, most employers are finding it difficult to recruit talent locally. As many as 81% of executives responding to a June 2018 survey by recruitment firm Manpower confirmed a skills shortage in the market. The country is now betting on the development of a dual educational system to deepen its talent pool.

Corrupting progress

In spite of these positives, corruption persists in Romania despite major efforts by an anticorruption agency that has been praised for its achievements when compared with its neighbours. Agency head Laura Codruta Kovesi was abruptly fired in July, raising a few eyebrows among local and international observers. 

“It’s going to be critical to watch how the process to choose a successor unfolds in the coming months. If [the appointment] is apolitical and professional, that would help a lot. Otherwise, that would be devastating for investors,” says Mayer Brown’s Mr Gitenstein.

The reform of Romania’s numerous state-owned companies (SOEs) has also stalled recently. The social-democratic government elected in December 2016 has shown little political will to give continuity to governance reforms of SOEs and their privatisation.

“Today we have a situation where we have successive interim managers appointed with a mandate of four months... and the real issue now that we are dealing with interim managers in companies that have typically an extremely long investment horizon,” says Johan Meyer, lead portfolio manager at Fondul Proprietatae, a fund managed by Franklin Templeton that was created by the state in 2005 to compensate citizens whose assets were confiscated under the communist regime.

“The investment climate in the country is still good, but it’s critical to point out the need for stable and predictable regulatory and legislative environment. This is what really gives investors confidence to put money into a country,” he adds.