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No longer the laggard

Romania is catching up with its eastern European neighbours in the attraction of foreign direct investment. Matei Paun reports on last year’s record performance and conditions that bode well for the future.
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Four years of economic growth, disinflation and economic reforms have finally started to pay dividends for Romania. Any country that exhibits such characteristics is likely to make investors pay attention, particularly if that country is also about to become a member of the EU.

Romania has long been a laggard in terms of foreign investment, silently suffering as its richer, more reform-minded neighbours grabbed the bulk of foreign direct investment (FDI) throughout the past decade. 2004 marks a turning point in this regard.

Record inflow

The latest data from National Bank of Romania (NBR) puts FDI in Romania at a whopping €4.049bn in 2004. This was only just behind Poland, which received the highest FDI in central and eastern Europe in 2003, attracting €4.2bn during the same period.

Romania’s recent performance represents an increase of 141% on 2003 and of 105% on what pundits had predicted for 2004. Furthermore, this translates into $235 per capita in Romania, compared with $254 in the Czech Republic, $248 in Hungary and $110 in Poland. With this performance, Romania is starting to make its presence felt as a vigorous competitor for investments to the detriment of other, until now, more attractive eastern European economies.

In part, the 2004 result is due to the privatisation of SNP Petrom, the largest state-owned oil company in south-eastern Europe, to OMV of Austria for €1.6bn. Other important privatisations that contributed to the FDI total were the increased social capital subscribed by major stakeholders of the Romanian market, such as €108.7m for BCR and €109.72m for Automobile Dacia.

Good prospects

The prospects for 2005 are optimistic due to, among other factors, the privatisations in the energy sector, which are expected to continue and to increase in scope, as well as to other investments already in the pipeline. According to the NBR, in 2005 Romania should prepare to receive between €5bn and €6bn.

As the energy sector restructuring and privatisation is well under way, more FDI generating sales are to be expected in 2005. Petrom and the two main electricity distributors, Banat and Dobrogea, and the two gas distributors, Distrigaz Sud and Distrigaz Nord, have been successfully privatised recently. The privatisations of the remaining electricity distribution companies are at an advanced stage. The negotiation of the privatisation contracts for a further two electricity distributors, Oltenia and Moldova, are expected this year.

The sale of the largest electricity distributor, Muntenia, and of the various generation plants that have resulted from the recent restructuring of the former Termoelectrica are also expected to accelerate. This process is supported by International Monetary Fund-mandated gradual price adjustments, both for electricity and gas, and by a gradual opening of electricity and gas markets (presently 55% of the electricity market and 50% of gas market is considered to be liberalised).

The same trend can be seen in the banking sector, where privatisations are also drawing to an end but not without a final big bang. The sale of the Romanian Savings Bank, Casa de Economii si Consemnatiuni, is expected to be completed by the end of 2005. In June 2004, the government sold a 25% stake in the country’s largest commercial bank, Banca Comerciala Romana (BCR), to the European Bank for Reconstruction and Development and International Finance Corporation. It is expected to sell a further 25% in BCR to a private investor this year.

High potential

Romania, with its large and well-educated population, has always had the potential to attract significant amounts of investment, particularly as the FDI wave was making its way across the eastern European region. With strong export-oriented sectors such as textiles and leather goods, but also furniture manufacturing, IT and heavy manufacturing, including the automotive sector, Romania is set to continue its development as a competitive export base for Western manufacturers seeking to maintain margins.

At the same time, Romania’s internal demand is likely to keep the telecommunications, energy, banking, retail and construction sectors in need of foreign investments for years to come.

The president of the Romanian Association for Foreign Investments, Alexandru Popa, says: “Romania can continue in 2005 its upward trend of investments, and it will be able to absorb a volume of FDI that will keep us at the forefront of the central and east European countries in this respect, due to measures such as the new policy of tax relaxation adopted early this year and backed by strong macroeconomic figures.”

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Read more about:  Central & Eastern Europe , Romania