Romania country assessment

• Further fiscal reforms are needed. These include the clearing of public arrears and ongoing reforms to the social security, pension and health care system.
  
• Road commercialisation measures should be advanced. Private finance should be attracted into the road sector, where major investments are greatly needed, either under the Concession Law, or under the new Public-Private Partnership (PPP) Law once it is approved by the European Union.
  
• The government’s energy sector strategy should be clarified. The uncertainty over whether two national champions will be created should be resolved by the end of the year, by which time the government’s plans and timings for further privatisations of energy companies should be clarified, thus providing opportunities to attract fresh investment into the sector.

Following a deep recession in 2009, the economy has struggled to recover in 2010. Real gross domestic product (GDP) decreased further in 2010 by 1.3 per cent despite a strong performance in exports, which increased substantially by more than 20 per cent year-on-year. Foreign direct investment (FDI) also fell by approximately 26 per cent in 2010 after an already sharp drop in 2009. The recovery has consolidated somewhat in 2011, as exports continue to grow. Imports are also rising. Industrial production performed strongly in early 2011 but has slowed in mid-2011. Inflation peaked in May 2011 at 8.4 per cent on an annual basis, but has dropped significantly since then, partly because of base effects. Despite an increase in the ratio of non-performing loans (NPLs), the banking sector remains liquid and well capitalised, while private sector credit growth has gradually returned. In July 2011 the international ratings agency Fitch Ratings improved Romania’s sovereign rating to “investment grade”.
 

Fiscal performance has been quite disciplined in the past two years. Fiscal policies are anchored by a 24-month precautionary IMF Stand-By Arrangement (SBA) of €3.5 billion approved in March 2011, together with an EU precautionary Balance of Payments assistance programme of €1.4 billion in force since June 2011. These programmes follow the successful completion of the joint IMF/EU assistance programmes initiated in 2009. The 2010 budget deficit stood at 6.5 per cent of GDP, which was partly achieved by major cuts to social benefits and public wages reform, as well as an increase in the VAT rate. The 2011 budget deficit is targeted at 4.4 per cent of GDP (on a cash basis). The National Bank of Romania (BNR) has kept its key policy rate unchanged since May 2010 at 6.25 per cent. It further implemented measures to align with standards of the European Central Bank and introduced a number of amendments to the minimum reserve requirements.
 

The economy is expected to remain stable but grow slowly. Full commitment by the government to the IMF/EU programmes will help maintain macroeconomic stability, though risks continue to stem from the still high level of accumulated domestic arrears.  In addition, the Romanian banking system remains exposed to subsidiaries of foreign parent banks, and could suffer significant setbacks if the eurozone debt crisis were to further deteriorate.

Absorption of EU structural and cohesion funds remains at a low level. According to recent figures, Romania has absorbed only about 4 per cent of the €20 million allocated to the country for the period 2007-13. To increase the absorption rate, a new ministry to coordinate implementation of EU programmes is being established, and public procurement legislation is being amended.

Romania has made progress in judicial and integrity reforms, but more work is needed. In its annual progress report on Romania under the Cooperation and Verification Mechanism, the European Commission (EC) welcomed continued improvements in the efficiency of judicial procedures and the fact that the National Integrity Authority has started operating under an amended legal framework, as recommended in last year’s report. However, the EC urged the authorities to further enhance the fight against corruption and to swiftly complete the reform of the judiciary system. At a meeting of the EU justice and interior ministers in June 2011, Romania’s planned access to the Schengen Zone was postponed, with the delay linked to insufficient progress in the fight against corruption. Meanwhile, implementation of anti-monopoly laws has been strengthened over the past year.
 

The government has committed to divest remaining state assets in a variety of companies, mostly in energy and transport. In November 2010 the authorities offered the state’s 46 per cent stake in the land-line operator Romtelecom to the majority shareholder, Greece’s OTE, which holds the remaining 54 per cent. However, OTE turned down the authorities offer in May 2011, citing mainly external economic difficulties. In July 2011 the government and OTE agreed to sell some or all state-owned shares through an initial public offering on the local stock exchange in the coming year. In February 2011 the government launched an international tender for the sale of a 9.84 per cent share in the oil and gas company OMV Petrom, in which it currently holds 20.58 per cent, hoping to raise up to €500 million through a secondary public offer (SPO) on the Bucharest stock exchange. The minimum asking price was set at €485 million, but the SPO failed at the end of July 2011 after offers were below the floor price. Plans to restructure and sell stakes in other state companies are being agreed with the IMF.
 

Shares are being offered in a number of energy companies. Two 15 per cent SPOs are planned for the electricity transporter Transelectrica and the natural gas transporter Transgaz. The government is also considering an issue of 10 per cent shares in the country’s two main electricity producers, the hydro power system operator, Hidroelectrica, and the nuclear plant operator, Nuclearelectrica. Both companies were involved in plans to restructure 21 state-owned power utilities and merge them into two “national champions”. However, these plans have faced opposition and may be cancelled if nothing happens by the end of 2011.
 

New energy sources are being developed. The government’s revised energy strategy 2011-35 aims to increase the share of renewable energy sources to 16.3 per cent in 2011, and envisages the creation of two additional nuclear power plants, which are to replace fossil-fuelled capacities. In July 2011 the European Commission approved the green certificates renewable energy support scheme, which is expected to significantly increase investments in the renewable generation sector in the short to medium term.
 

The development of public-private partnerships (PPPs) in the roads sector is still lagging behind. A new PPP law entered into force in October 2010, but it faced significant national and international opposition on the grounds that it breached EU legislation on public procurement and the Romanian constitution. In April 2011 the law was amended to harmonise it with EU standards, primarily by increasing transparency on PPP projects. It currently awaits approval from the European Union, but in the meantime  new motorways can still be developed with private sector financing, under the existing Concession Law. In August 2011 the government renegotiated and scaled down the contract with the US company Bechtel on the construction of the 415 km Transylvania motorway project signed in 2004. There were issues with Bechtel’s performance and the payment from the state budget. The construction of the remaining planned motorway sections may be carried out under concession or PPP contracts.
 

The banking system has remained well capitalised and profitable. The Vienna Initiative, under which the main foreign banks committed to maintain their exposures to their subsidiaries in Romania through the crisis, formally expired in early 2011. However, in March 2011 the parent banks of the nine largest foreign-owned bank subsidiaries further affirmed their long-term support to the Romanian banking sector. Preparations have begun to introduce International Financial Reporting Standards (IFRS) for the banking sector in 2012.
 

Important social reforms have been implemented or are under way. These include pension reforms, increasing the retirement age to 63 for women and 65 for men, harmonisation of public wages, reform of social benefits (including employment insurance, maternity benefits and social assistance programmes), and health care reform.