Macroeconomic developments 2019
The estimates published on April 7 maintained unchanged the annual real GDP growth in the 4th quarter of 2018 and the real GDP growth in 2018.
The budget deficit registered in February was large, amounting to RON 5.9 billion.
The annual inflation rate rose to 4% in March, from 3.8% in February, slightly exceeding analysts’ expectations expressed in the Bloomberg survey (3.9%).
At the monetary policy meeting of April 2, the National Bank of Romania maintained the key interest rate unchanged at 2.5%, in line with the analysts’ expectations. The monetary policy communiqué and the Governor's remarks during the press conference highlighted NBR’s intention to maintain strict control over money market liquidity.
GDP data for Q4 2018 slightly changed, but the overall picture remains unchanged
The estimates published on April 7 maintained unchanged the annual real GDP growth rate in the 4th quarter of 2018 (4.1% yoy) and the real GDP growth in 2018 (4.1% yoy). Nevertheless, the new estimates slightly changed the GDP quarterly trajectory in 2018. For example, the quarterly growth in Q3 2018 was revised downwards (to 1.4%, from 1.7%, as estimated one month ago), and the quarterly growth in Q4 2018 was revised upwards (at 0.9%, from 0.7% initially estimated). Revisions were also recorded in the quarterly trajectories of some GDP components. In the fourth quarter of 2018, notable are the upward revision of the quarterly dynamics of the exports of goods and services (an increase by 1.4%, compared to the initially estimated decrease of 1.3%), the downward revision of the quarterly dynamics of gross fixed capital formation (decrease by 0.7%, compared to an initially estimated increase of 0.3%) and the downward revision of public consumption. On the supply side, both the dynamics of the industry and the construction sectors have been revised downwards.
Large budget deficit after two months
The public budget deficit registered in February was large, amounting to RON 5.9 billion. Thus, the public budget execution for the first two months of 2019 resulted in a deficit of RON 5.2 billion, or 0.5% of the official GDP forecast for the entire year 2019. A reduction in the budget deficit can be noted as compared to January - February 2018, when the budget deficit represented 0.6% of GDP. However, the larger budget deficit in the first two months of 2018 has materialized in the context of large and non-recurrent spending with military equipment in February 2018. Otherwise, it should be taken into account that during the previous three years (2015-2017), the public budget was balanced or in surplus in January-February (0.3% of GDP in 2015, 0.1% of GDP in 2016 and 0% of GDP in 2017).
Euro area: At the monetary policy meeting held on April 10, the European Central Bank maintained unchanged the reference interest rates and brought no changes with regards to the monetary policy outlook for the quarters to follow. The latest published data on the performance of the Eurozone economy are not very encouraging, nor offer indications of reviving economic growth.
US: Signs of a slowdown in economic growth are also seen in the US economy. Economic growth during the 1st quarter could have been lower than in the previous quarters. In March, the rise in consumer prices slowed down more than economists expected. Under these circumstances, the Central Bank (Fed) has room to remain on hold and maintain the monetary policy rate unchanged in the following quarters.
Eurozone: The Central Bank remains prudent
At the monetary policy meeting held on April 10, the European Central Bank (ECB) maintained unchanged the reference interest rates and brought no changes with regards to the monetary policy outlook for the quarters to follow.
Please note that at the March monetary policy meeting, the ECB announced a major recalibration of its monetary policy for the next period, postponing the moment at which reference interest rates could start to rise and announcing a new round of cheap money lent to the banks (money obtained by banks will be further used for cheaper financing of companies and population).
The latest published data on the performance of the Eurozone economy are not very encouraging, nor offer indications of reviving economic growth. Further, the performance of the German economy continues to be disappointing, especially with regards to the evolution of industry and exports. Thus, industrial production in Germany declined both in January and in February. Positive developments are, however, recorded in the evolution of domestic demand indicators. In real terms, the retail sales increased in the Eurozone both in January and in February. The advance is supported by favorable conditions in the labor market (increase in earnings, decrease in unemployment). During the first quarter, in the Euro area there was also a slight improvement in consumer confidence.
The highly prudent attitude of the European Central Bank is also justified by the low intensity of inflationary pressures in the economy, below the level needed to reach the 2% inflation target over the next period. Thus, the annual inflation rate in the Eurozone stood at 1.4% in March, slightly below the level registered in February (1.5%). The annual dynamics of the core inflation (prices for food goods, energy products, tobacco and alcohol are excluded from the consumer price index) decelerated faster than expected in March (down to 0.8%, from 1.0% in February).
FDI in Figures
FDI in Romania amounted to USD 5.1 billion in 2017, up by 3% compared to the same period of 2016, according to data by the Romanian National Bank (BNR) and UNCTAD. Equity investments, including reinvested profits, totaled EUR 3.5 billion while intercompany lending recorded a net value of EUR 875 million. The total stock of FDI stood at USD 88.2 billion (46.5% of GDP) at the end of 2017 (UNCTAD 2018 World Investment Report).
Though the recent political tension could hinder investments, Romania has numerous advantages: in addition to a large domestic market, the country has a strong industrial tradition, coupled with a cost of labour among the lowest in the EU. This has been the reason for the development of a significant industrial sector, particularly car making, but also services. Furthermore, on 1 January 2018 additional tax cuts came into effect, making Romania one of the lowest tax jurisdictions in the EU. The low tax regime favours industrial investment and start-up initiatives equally. Romania ranked 45th out of 190 economies in the 2018 Doing Business Report, issued by the World Bank.
The distribution of foreign direct investment by sector shows a lead of the industrial sector (more than one-third of the total), with the metallurgy industry standing out. Other sectors have attracted investors, such as banking and insurance, wholesale and retail, energy, construction and telecommunications. The regions that attract the most foreign capital are Bucharest (more than 60% of the total), the centre and the south. The main investors in Romania are France, Austria, the Netherlands and Germany.
What to consider if you invest in Romania
The main assets of the country for attracting foreign investment are:
The country's accession to the EU since 2005 has allowed it to improve the country's international relations and put an end to its relative isolation
The introduction since its accession to the EU of prudent monetary measures that have enabled the country to gain the confidence of foreign investors
A relatively low level of public debt and a favourable growth rate: from 3.9% in 2015 to 6% in 2017 (Euler Hermes, 2018)
A relatively large domestic market with almost 20 million inhabitants in 2018
A qualified and low-cost workforce
A strong agro-food industry (wheat, barley, rapeseed, etc.)
The main weaknesses of the country are:
Persistent political instability
Large scale corruption, including the government's inability to make good use of the European Union's aid funds
A large informal economy
Judicial, legislative, fiscal and regulatory unpredictability weakening the confidence of the business community
A relatively poor population with limited purchasing power
Fragility in the banking sector, which does not discourage investment and entrepreneurial risk taking
High debt in foreign currencies the private sector
High external debt of the country
Government Measures to Motivate or Restrict FDIRomania is actively seeking to attract foreign direct investment and has taken steps to strengthen tax administration, improve transparency and create legal means to resolve contractual disputes quickly. Similarly, since 2009, the various governments have been able to reduce the budget deficit from 9.1% of GDP in 2009 to 3.6% in 2017.
The rise in wages, and in particular the minimum wage at RON 1 450 (about EUR 320), makes it possible to boost growth through sustained household consumption. Finally, the application of a new tax code, adopted in September 2015, allowed the introduction of numerous tax adjustments in favour of the liberalisation of the economy, including a reduction of the VAT rate from 24% to 19% in 2017 and a dividend tax reduction of 16 to 5% in 2017.
Bilateral Investment Conventions Signed By RomaniaRomania has signed bilateral agreements on investments with 96 countries.
To see the list of countries, consult the UNCTAD Investment Policy Hub.
Procedures Relative to Foreign Investment
Freedom of Establishment: Yes.
Acquisition of Holdings: Taking the majority shareholdings of a Romanian company is allowed.
Obligation to Declare: The Foreign Investment Directorate of the Ministry for Foreign Investments and Public-Private Partnerships can inform one about the necessary requirements to set up a business.
Competent Organisation For the Declaration Foreign Investment Directorate, Department for Foreign Investments and Public-Private Partnerships.
Requests For Specific Authorisations: Specific authorisations or licences in some strategic sectors, such as energy, environment, etc. Foreign investment must comply with environmental protection, national security, defence, public order and public health interests and regulations.
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